The effect of Financial innovation techniques on risk management by Non-financial institutions in Kenya

Abstract

The recent global financial crisis has led to the development of derivatives markets in most of developed economies. Derivatives are the major icon among risk management practices. Firms usually use derivatives to hedge their foreign exchange and interest rate risks. This study aimed to examine the effect of Financial Innovation Techniques on Risk Management by Non-Financial Institutions in Kenya. The study adopted a descriptive research design and used primary data from 39 non-financial firms listed in Nairobi Securities Exchange of which 31 firms responded. Based on the theoretical investigation, we find that institutions use derivatives for hedging, liquidity and risk management purposes. Also, there is evidence that arbirageous and speculators use derivatives too for different reasons. Despite challenges such as complexity in use of derivatives and lack of organized markets, the efficacy of derivatives as a means of managing economic and other forms of risks remain widely accepted. Data collected was used to develop a multiple regression model using SPSS. From the findings information diffusion, transparency, skills and regulations and technology support at 1%, 5%, and 10% level significance, were significant in explaining the variation in derivatives usage. These findings suggest that financial innovation strategies are associated with risk management.