The Effect of Macroeconomic Factors on Financial Performance of Investment Banks in Kenya

Abstract

The aim of this research project was to establish the effect of macroeconomic factors on financial performance of investment banks in Kenya. Return on capital employed was used as the financial performance indicator. The financial performance was regressed against the macroeconomic indicators; GDP growth rate, real exchange rate (Ksh/USD), inflation rate as computed by CPI and money supply. Both the dependent and independent variables were measured quarterly. A descriptive research design was employed in the research study. The study population comprised 24 investment banks that are licensed by CMA in Kenya by the year 2016. The study utilized secondary data that was collected quarterly. The data was collected from various sources; the World Bank, Central Bank of Kenya, Kenya National Bureau of Statistics and the industry financial statements as reported by CMA. The study was carried out in a fifteen-year period from 2002 to 2017. The analyzed data was presented using tables and line graphs. The study found that GDP growth rate had a P-value of (0.0263<0.05) which is statistically significant while exchange rate had a P-value of (0.3831>0.05), inflation rate had a P-value of (0.0928>0.05), M1 had a P-value of (0.9224>0.05) and M3 had a P-value of (0.4800>0.05). These P-values are greater than 0.05 and therefore statistically insignificant; hence, interest rates, exchange rates and money supply are not suitable predictors of the investment bank’s financial performance. It is crucial that other factors both micro-economic and industry specific factors are considered while undertaking similar study in order to determine the drivers of performance of the investment banks. The research study recommends that the CBK should keep inflation, exchange rates and GDP Growth rates in check. These variables have profound effect on the performance of investment banks. For instance, high exchange rates, translates to devaluation of the local currency and will cause a decrease in the performance of the industry. The study also recommends that the government to initiate policies and measures that increase the GDP, which will lead to a positive effect on the industry and the economy as a whole.