Effect of Foreign Exchange Fluctuation on Financial Performance of Commercial Banks in Kenya

Abstract

Participation in foreign currencies has not only been effective but has brought various financial risks to the commercial banks including continued fluctuation of forex. Over the years, Kenyan currency has continued to depreciate against strong currencies such as US dollar, and this has made it difficult for making commercial banks to predict the future exchange rates and participate in international market. The current study aimed at finding solution to this problem through determining effects of exchange rate fluctuations on financial performance of commercial banks in Kenya. The study specific variables were interest rate, bank size, inflation rate and exchange rate. The study was anchored on purchasing power parity theory, interest rate parity theory and international fisher effect theory. In research design, the study used descriptive research towards addressing study phenomenon. The target population for the study was commercial banks in Kenya. The study adopted secondary data collection techniques towards collection of past information in relation to interest rate fluctuations, bank size, inflation rate fluctuations, exchange rate and financial performance. The study used a combination of excel and SPPS as data analysis tool where disruptive and inferential statistics were conducted such as minimum and maximum, mean and standard deviation, correlation, regression and multicollinearity statistics. In research findings, quarterly data from 2008-2018 identified that interest rate fluctuation, growth in bank size, inflation rate fluctuation and exchange rate fluctuation has significant relationship with performance of commercial banks in Kenya. At Sig. P<0.05, the study concluded that there is relationship between interest rate fluctuation, bank size, inflation rate, exchange rate and financial performance of commercial banks. The study recommended the need for banks to consider advising the government on matters finance and ensure that effective diversification to international have been enhanced as a strategy to beat exchange rate fluctuation.