The Effect of Market Risk on Financial Performance of Commercial Banks in Kenya
Journal of Finance and Accounting
Volume 4, Issue 4, July 2016, Pages: 225-233
Received: Jun. 17, 2016; Accepted: Jul. 7, 2016; Published: Jul. 23, 2016
Views 7276      Downloads 403
Authors
Jane Gathigia Muriithi, Department of Economic, Accounting and Finance, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
Willy Mwangi Muturi, Department of Economic, Accounting and Finance, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
Kennedy Munyua Waweru, Department of Finance and Accounting, Co-operative University College of Kenya, Nairobi, Kenya
Article Tools
Follow on us
Abstract
Despite the growth in the Kenyan banking sector, market risk still remains a major challenge. The objective of study was to assess the effect of market risk on financial performance of commercial banks in Kenya. The study covered the period between year 2005 and 2014. Market risk was measured by degree of financial leverage, interest rate risk and foreign exchange exposure while financial performance was measured by return on equity. The study used the balance sheets components and financial ratios for 43 registered commercial banks in Kenya. Panel data techniques of random effects, fixed effects estimation and generalized method of moments (GMM) were used to purge time–invariant unobserved firm specific effects and to mitigate potential endogeneity problems. The pairwise correlations between the variables were carried out. F- test was used to determine the significance of the regression while the coefficient of determination, within and between R2, were used to determine how much variation in dependent variable is explained by independent variables. From the results financial leverage, interest rate and foreign exchange exposure have negative and significant relationship with bank profitability. Based on the study findings, it is recommended that commercial banks especially locally owned are required to consider finding ways of mitigating the market risks by use of financial instruments such as financial derivatives and be active in derivatives markets. These may reduce their interest rate risk and foreign currency risk exposure. The commercial banks are also required to monitor the financial leverage so as to reduce the financial risk.
Keywords
Market Risk, Financial Performance, Commercial Banks, Degree of Financial Leverage, Interest Rate Risk, Foreign Exchange Exposure, Kenya
To cite this article
Jane Gathigia Muriithi, Willy Mwangi Muturi, Kennedy Munyua Waweru, The Effect of Market Risk on Financial Performance of Commercial Banks in Kenya, Journal of Finance and Accounting. Vol. 4, No. 4, 2016, pp. 225-233. doi: 10.11648/j.jfa.20160404.18
Copyright
Copyright © 2016 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
References
[1]
Aruwa, S. A. S., and Musa, A. O. 2014. Risk components and the financial performance of deposit money banks in Nigeria. International Journal of Social Sciences and Entrepreneurship, 1 (11), 514-522.
[2]
Bodnar, G., & Marston, R. (1996). 1995 Survey of derivatives usage by US non-financial firms. George Weiss Center for International Financial Research, Wharton School, University of Pennsylvania.
[3]
Cornelia, E. T. (2012). The problems and prospects of management of small-scale business in Nigeria. (Doctoral dissertation, Department of management, Faculty of Business adiministration, University of Nigeria Enugu campus).
[4]
Diebold, F. X., Schuermann, T., and Stroughhair, J. D (2000). Pitfalls and Opportunities in theUse of Extreme Value Theory in Risk Management. Journal of Risk Finance 1 (2), 30-35
[5]
Gachua, N. F. 2011. The effect of foreign exchange exposure on a Firm’s financial performance: a case of listed companies in Kenya (Doctoral dissertation, KCA University).
[6]
Galvao, A. F., Montes-Rojas, G., Sosa-Escudero, W., and Wang, L. 2013. Tests for skewness and kurtosis in the one-way error component model. Journal of Multivariate Analysis, 122, 35-52.
[7]
Hull, J. (2012). Risk Management and Financial Institutions, + Web Site (Vol. 733). John Wiley & Sons.
[8]
Jorion, P. (1997). Value at Risk: The New Benchmark in controlling market risk. Irwin, Chicago, 1, 997.
[9]
Koch, T., and MacDonald, S. 2014. Bank management. Nelson Education.
[10]
Lempert, R. (1966). Strategies of research design in the legal impact study: The control of plausible rival hypotheses. Law and Society Review, 1, 111-132.
[11]
Ngalawa, J., and Ngare, P. 2013. Interest rate risk management for commercial banks in Kenya. Journal of Economics and Finance (IOSR-JEF) e-ISSN: 2321-5933, Retrieved from; www.iosrjournals.org
[12]
Nimalathasan, B., and Pratheepkanth, P. 2012. Systematic Risk Management and Profitability: A Case Study of Selected Financial Institutions in Sri Lanka. Global Journal of Management and Business Research, 12 (17).
[13]
Roodman, D. (2006). How to do xtabond 2: An introduction to difference and system GMM in Stata. Center for Global Development working paper, (103).
[14]
Stimson, J. A. (1985). Regression in space and time: A statistical essay. American Journal of Political Science, 914-947.
[15]
Verbeek, M. (2004). A guide to modern econometrics. (2nd ed). Southern Gate, Chichester, West Sussex, England Hoboken, NJ: John Wiley & Sons.
[16]
Wachiaya, J. 2011. A survey of market risk management techniques by commercial banks in Kenya and their suitability in mitigating financial loss (Doctoral dissertation, University of Nairobi, Kenya).
[17]
Worzala, E. 1995. Currency risk and international property investments. Journal of Property valuation and Investment, 13 (5), 23-38.
ADDRESS
Science Publishing Group
1 Rockefeller Plaza,
10th and 11th Floors,
New York, NY 10020
U.S.A.
Tel: (001)347-983-5186