The Effects of Financial Risk Management Practices on Financial Performance of Oil Marketing Companies in Kenya

Abstract

Proper management of risks ensures that the financial earning capacity of a firm is enhanced and guarantees future firm growth. Risk management techniques bring more benefits than raise costs in financial institutions while cost are easily recognized and recorded, benefits are more obscure. The objective of this study was to determine the effects of financial risk management practices on financial performance of oil marketing companies in Kenya. The study adopted a descriptive research design. The target population for this study was the 23 oil marketing firms operating in Kenya as at June, 2014. These oil marketing companies were selected because of their involvement in the role in oil marketing business both at local and international levels. All the 23 targeted oil marketing companies had a representative office in Nairobi which made them more accessible. The study used both primary and secondary data. The collected data was thoroughly examined and checked for completeness and comprehensibility. Descriptive statistics such as means, standard deviation and frequency distribution were used to analyze the data. Data was coded and entered into the Statistical Package for Social Sciences (SPSS) for analysis. On interest rate risk management, the study concluded that the oil marketing companies in Kenya have interest rate management policy and that they periodically review the interest rate policies. On foreign exchange risks management practices, the study concludes that the oil marketing firms in Kenya have documented foreign exchange rate management policy and that they maintain foreign currency denominated accounts. On trading liquidity risk management practices, the study concludes that oil marketing firms in Kenya have a well documented liquidity risk management policy and that the policy is reviewed frequently as need arises. This study therefore recommends that the management of the firms come up with management policies that will address the variations in interest rates at different times. The study also established that the firms have internal controls and independent audits. This study recommends that the firms also conduct audits by external auditors. This study therefore recommends that in order to deal with the fluctuating international oil prices, the firms need to increase the use of financial derivatives in a bid to hedge their risks.