A survey of market risk management techniques by commercial banks in Kenya and their suitability in mitigating financial loss
The banking sector is the backbone of the Kenyan economy and it is a critical vehicle that Links the Kenyan economy to the rest of the world. In the process of providing financial services, banks assume various kinds of financial risks among them market risk. The adoption of appropriate market risk management techniques is therefore an essential ingredient of a successful banking system in Kenya. Poor market risk management practices can lead to significant losses very quickly in volatile market conditions and also complete institutional collapse in severe situations. Therefore the purpose of this study was to identify the Market Risk Management Techniques used by commercial banks in Kenya and their suitability in mitigating financial loss. The research design adopted in the study was a census survey. The population used consisted of the 43 commercial banks licensed to operate in Kenya as listed by the Central Bank of Kenya. Primary data collection through the use of a questionnaire was used to gather information from the target population outlining issues relevant to the study. Analysis was then done using Microsoft Excel and SPSS. The analysis sought to generate descriptive statistics and frequencies. Finally presentation of the results was done by use of frequency tables, graphical presentation and pie-charts. The results of the study showed that the main techniques used were Scenario analysis and Stress Testing to a very large extent. Historical simulation, back testing and sensitivity analysis were used to a large extent. Mark-to-market of securities was used to some extent. The variance/covariance technique was rarely used and mechanical stress testing and stochastic simulation were not used at all. Limits were also set on market risk for various reasons. The major finding was that limits ensured management of risk exposure within the bank's risk appetite. Another reason was that limits ensured the dealers were limited from over-exposing the bank. Other reasons were limits ensured banks took acceptable limits as approved by the shareholders and there was prudent management of market risk. Other minor reasons were to ensure prudent management ofthe bank's assets and liabilities and for monitoring purposes. In conclusion, the techniques used by banks in Kenya to manage Market Risk are Scenario analysis, Stress Testing, Historical simulation, back testing, Sensitivity analysis, Mark-to-market of securities and the variance/covariance technique. From the findings we can conclude that the most widely used technique is Scenario analysis, back testing and sensitivity analysis done on a weekly basis. Historical simulation, stress testing and mark-to-market of securities are done on a weekly basis while Variance/covariance is used on a quarterly basis. In light of the above findings, it's imperative that banks in Kenya pick out best practices from each 9~in order to put market risk exposure under control to mitigate the effects of losses due to this risk. The banks' risk management framework had several objectives chief among them to minimize market risk losses and maintain liquidity.
University of Nairobi, Kenya