The effect of foreign exchange rate fluctuation on the financial performance of motor vehicle firms in Kenya

Abstract

Exchange rate plays an increasingly significant role in motor vehicle industry in Kenya as it directly affects domestic selling price level, profitability, allocation of resources and investment decision in the industry. The fluctuation or volatility in the exchange rate has attracted public attention especially from importers who have argued that the strengthening shilling is eroding their competitiveness (Ndung’u, 2000). The study objective was to determine the effect of foreign exchange rate fluctuation on the financial performance of motor vehicle firms in Kenya. Secondary data was collected from the Companies Financial Report. Regression analysis was done for the periods to determine the effect of foreign exchange rate fluctuation on the financial performance of motor vehicle firms in Kenya. The study covered a period of 10 years from year 2003 to 2012. The study revealed that there was negative relationship between translation exposure using sales, translation exposure using raw material cost, transaction exposure using accounts receivable, transaction exposure using accounts payable, total machinery and equipment, economic exposure and firm financial performance, this is an indication that foreign exchange rate fluctuation negatively affect the firm financial performance , thus the study concludes that foreign exchange rate fluctuation negatively affect financial performance of motor vehicle firms in Kenya. From the findings and conclusion the study recommends that companies in motor vehicle industry should apply various hedging techniques which are most effective in order to reduce the risk by foreign exchange rate fluctuation.