The Effect of Market Risk on the Financial Perfomance of Commercial Banks in Kenya

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 2010 and 2015. 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 42 registered commercial banks in Kenya. The pairwise correlations between the variables were carried out. F-test was 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 relationships with bank profitability. Based on the study findings, it is recommended that commercial banks especially locally owned and required to consider findings was 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 financial risk.