The Effect of Foreign Exchange Exposure on Financial Performance of Oil Marketing Companies in Kenya

Abstract

Corporates whose business involves dealing with foreign currency are inevitably exposed to foreign exchange risk, Foreign exchange exposure affect operating cash flows and firm value through translation, transaction, and economic effects of exchange rate risk exposure. Income based on fair values reflects income volatility more than historical cost-based income, The study sought to establish the effect of foreign exchange exposure on financial performance of oil marketing companies in Kenya, This study adopted a descriptive research design, The target population for this study was the 55 companies and sample 12 registered by Energy Regulatory Commission, where all the companies were involved , secondary data from 2010 to 2014 on performance of oil marketing companies in Kenya was collected from the Energy Regulatory Commission. Secondary data was used in this study; specifically the study used financial statements the data was coded using SPSS (version 21). The study revealed that found that there existed significance strong and negative correlation between foreign Exchange Exposure, interest rates and profitability (ROA). The study revealed that capital adequacy and firm sized had strong and positive correlation with profitability (ROA). The study established that there foreign exchange rate had significant negative effects of profitability of oil marketing companies. The high foreign exchange rate and interest rates would result into devaluation of the local currency leading to foreign loss and reduction in profitability. The regression results revealed that the capital adequacy and firm size had positive effects on Oil marketing company’s profitability (ROA). The study concluded that high Foreign Exchange rate (V) affects oil company’s profitability due to devaluation of local currency resulting into foreign loss indicating high oil company financial position sensitivity to changes in the exchange rate usually in US Dollar. The study concluded that capitalized oil marketing companies have high Capital Adequacy (CAPR) mean with a relatively peaked distribution as indicated by positive KURT indicating high capacity of the companies to mitigate foreign exposure risks. The study concluded that high interest rate would have significant and negative effects on Oil Company’s profitability hence increase in interest rates increase the cost of acquiring working capital and significantly decrease in profitability (ROA).