Effect of fluctuation in foreign currency exchange rates on financial performance of five star hotels in Nairobi

Abstract

For the organizations to remain competitive and thrive, they are necessitated to evaluate their external factors, which include foreign exchange market variability. Fluctuations in the exchange rates may impact on the external operations of a country, mainly through their impact on foreign trade transactions. Failure of organizations to manage their foreign exchange exposure will have negative impact on financial performance due to foreign exchange losses and gains. The study objective was to determine the effect of fluctuation in foreign exchange currency rates on the financial performance of hotels in Nairobi. This study adopted the descriptive research design. The target population was all the five star hotels operating in Nairobi Kenya. Due to the population being small, a census sampling approach was employed and all the ten five star hotels in Nairobi studied as per Tourism Regulatory Authority classification. The study used secondary data. Secondary data was obtained from the monthly management reports of the hotels which was analyzed on quarterly basis for the period between 2012 and 2016. Data obtained related to financial performance of five star hotels as measured by return on assets. Data relating to exchange rates, economic growth and information was obtained from Central Bank of Kenya. The study used quantitative data analysis techniques where Statistical Package for Social Sciences version 23 was used to analyze data. Test of significance of the results was done using Analysis of Variance. The findings obtained showed that Exchange Rate Fluctuations had a significant positive impact on the performance. Thus, depreciation of Kenya Shilling against the USD will lead to increased hotel financial performance. Inflation had a negative relationship on the financial performance of five star hotels. GDP on the other hand had a positive relationship. An improvement in the GDP translates to an improvement in other economy sectors. The study concluded that increased depreciation of Kenya shilling against the USD (increased exchange rate fluctuation) will cause an increase in the performance. This could be due to the hotels receiving much of revenues in USD. Further depreciating local currency improves exports and makes imports expensive. However, macrocosmic theory requires determination of optimal value for a currency and a stable exchange rate environment. The study therefore recommended that Central Bank of Kenya to come up with policies that will ensure stable exchange rate environment. Further studies were recommended to be done on other sectors and not entirely the hotel sector for instance firms in energy, manufacturing, agriculture, tourism and other sectors. This would provide a wide pool of research findings that can be compared across the business fraternity for optimal policy formulation. Future researchers can also undertake to ascertain the effectiveness of hedging strategies for instance usage of forwards contracts in reducing foreign exchange risks by the hotels