Effect of Foreign Currency Exchange Rates on Financial Performance of the Banking Sector in Kenya

Abstract

Kenya has experienced great change in conditions surrounding the banking industry. For the banks to remain competitive and thrive, they are necessitated to evaluate their external factors, which include foreign exchange market variability. However, the available literature has not been able to construct sophisticated measures of fluctuation in foreign exchange rates and definitively establish causal relationship that exists. The objective of this study was to determine the effect of foreign exchange currency rates on the financial performance of the Banking Sector in Kenya. This study employed the descriptive research design in collecting information. The study’s target population constituted all the 43 commercial banks in Kenya. The study used purely secondary data which entailed data on the macro-economic environment facing the commercial banks and their financial performance records. The study used quantitative analysis techniques to obtain information on the study variables. Frequency distributions, trend analysis figures and percentages were used to present the study results. In order to establish the relationship that exists between the study’s variables, multiple regression analysis was employed. The study found out that exchange rates have a significant positive effect on the financial performance of the banking industry in Kenya. The study also found out that size, and interest rates also have a positive effect on the commercial banks’ financial performance whereas inflation has a negative effect. The study thus concludes that the performance of the banking industry is highly influenced by the current currency exchange rates in the country. The study recommends that government through its policy makers should come up with measures and policies that will help control and stabilize foreign exchange rate fluctuation thus creating investor confidence in the securities market. To the managements at the banks, the study further recommends that the issues related to foreign exchange trading should always be taken into account in efforts to improve banks’ foreign exchange transactions and financial performance.