The Effect of Foreign Exchange Risk Management Practices on Financial Performance of Commercial Banks in Kenya

Abstract

The objectives of this study were to determine the effect of foreign exchange risk management practices on financial performance of commercial banks in Kenya. The research used a descriptive survey research design. The descriptive survey was ideal because it ensured thorough description of the situation ensuring least possible bias in data collection. The study made use of secondary data collected from annual reports submitted to the CBK for the target population comprised of all the commercial banks in Kenya. Summaries of data findings together with their possible interpretations were presented using tables, charts, correlations, standard deviations and regression. The study found out that mean of Forward Contracts is relatively high as compared to other variables while Cross – Currency Swaps had the highest standard deviation. Options had the highest positive correlation. Cross Currency Swaps and forward contracts also had high and positive correlation to the return. From the regression equation the study concluded that a unit increase in forward contracts, cross- currency swaps and options would lead to improvement on return on assets. Therefore; the study recommends that; foreign exchange risk management should always be taken in to account to improve the banks return on assets and hence the performance of the banks. Policy makers should also undertake to understand risks affecting the foreign exchange markets in order to maximize returns.