Exchange Rate Volatility and Financial Performance of Listed Commercial Banks in Kenya

Abstract

The study of financial performance is key in ascertaining the health of organizations. Notably, the study of Kenyan banking industry’s performance is important because unlike in the recent past when banks were restricted to borrowing and lending money, banks have evolved to offer diversified services from mobile banking to stock broking and portfolio management. They have gradually shifted from being primarily focused on money transactions to businesses focused on information on financial transactions. Exchange rates play a fundamental role in a country’s economy because it affects price levels, firms’ productivity, distribution of resources and investment decisions. Exchange Rate Volatility can have lethal effects on production levels interest rates, prices, employment opportunities and wage rates. From a banking perspective, exchange rate volatility is a business risk and could lead to massive exchange rate losses. The study objective was to find out the behavior of exchange rate over the study period and how this relates to the performance of listed commercial banks in Kenya. This study adopted a descriptive survey design as it aimed at giving an accurate presentation on the how a volatile exchange rate impacts on listed commercial banks overtime. The target population comprised the 11 listed commercial banks at the Nairobi Stock Exchange as at December 2015.The study used secondary data derived from the statutory financial statements generated by the listed commercial banks as well as the Central Bank of Kenya database. The study focused on the Kenya shilling Versus United States Dollar exchange rate because the dollar is the principal payment currency for majority of Kenya’s international transactions and is considered a stable currency in the foreign markets. The study findings discovered a weak positive relationship using return on equity as a performance indicator. The study found out that the Kenyan Shilling USD was very volatile in the period under study and made recommendations to the Central Bank of Kenya to establish monetary thresholds or trigger values which can act as warning signs of volatility and as such can be monitored to increase the speed and responsiveness to the rapidly changing financial market in Kenya.