The relationship between market risk management tools and performance of investment firms in Kenya

Abstract

For effective implementation of risk management methodologies and practices within firms, it is crucial for organizations it identify and understand the key factors that influence success of market risk management initiatives as they have profound effects on firm performance. The objective of this study was to determine the relationship between market risk management tools and firm performance with a particular emphasis on investment firms in Kenya. A descriptive design study was used and a population of 26 firms targeted of which 19 responded. The study used both primary and secondary data. Primary data was sourced via a questionnaire sent to respective firms whereas secondary data was sourced from the investment firms issued financial reports. Regression analysis, was used to determine the strength of the model through ANOVA by use of significance of T-statistics and F statistics at 5% level as well as using coefficient of determination (R2). From the various components of risk management, the results reveal that risk management has a statistically significant relationship with financial performance. This is indicated by organizational culture, the link between risk management and organizational mission and objectives, determining the risk appetite, risk tolerance and risk treatment measures and linking risk management and strategic objectives. The study results also show that risk management tools have no statistically significant relationship with financial performance. From the findings, the researcher recommends that the Capital Markets Authority ensures that all players in the market align their risk management policy to their organizational culture to ensure all employees are aware of the risk management policies. The study further recommends that N.S.E and C.MA impress upon market players to have active teams within their structures to support the risk identification functions, which will be key to developing and implementing an essential risk management policy. Further the study recommends the setting up of key performance indicators by firms which can be used to gauge the performance of risk management policies owing to the effectiveness of key performance indicators in enhancing the performance of investment firms.