The relationship between foreign exchange trading and financial performance of commercial banks in Kenya

Abstract

Exchange rate movements have been a big concern for investors, analyst, managers and shareholders in commercial banks. However, little is known, at least in Kenya, of how foreign exchange trading influences commercial banks' financial performance and the direction of the relationship. The objective of the study was to establish the relationship between Foreign exchange trading and financial performance of commercial banks in Kenya. The study adopted a survey research design where all 42 commercial banks were the focus of the study. Data was collected from secondary sources: annual financial reports of commercial banks and foreign trading data (currency forwards and swaps, and spot trading) reported to CBK. Pearson correlation, descriptive statistics and multiple linear regression analysis were used. The study established that from the multiple regression analysis, the coefficients for spot trading was 13.491 (p<.OO1), currency forwards 3.113 (p = .057) and currency swaps 4.820 (p = .095). The study concludes that: currency swaps and forwards are negatively related with ROA while currency spot is positively related with financial performance. Thus, currency swaps, forwards and spots are significantly related with commercial banks' financial performance. From the determination coefficients, it can be noted that there is a strong relationship between dependent and independent variables given an R2 values of 0.856 and adjusted to 0.80 I. This shows that the independent variables (spot trading, currency forwards, and currency swaps) accounts for 80.1% of the variations in profitability as measured by ROA. The study recommends that commercial banks foreign trading variables currency options, currency forwards, and spot trading are very crucial in determining financial performance of commercial banks in Kenya, however, efforts should be concentrated on spot trading as it maximizes returns.