The Effect Of Macro-Economic Variables On Performance Of Investment Banks In Kenya

Abstract

Over the past ten years, the investment banks in Kenya have witnessed tremendous growth that has been attributed to more improved openness and reduced regulation in the sector which has aroused interest in the investing public. The investment banking industry like any other industries in the market is affected by various macroeconomic variables such as interest rate, inflation, unemployment, Gross Domestic Product (GDP), exchange rate fluctuations and money supply. Firms and individuals need to be well informed about the macro economic factors they are exposed to for mitigating risks and losses that might occur as a result. This study sought to determine the effect of macro-economic variables on financial performance of investment banks in Kenya. The independent variable were interest rates as measured by quarterly CBK lending rate, inflation rates as measured by quarterly CPI, exchange rates as measured by quarterly exchange rate between KSH/USD and economic growth as measured by quarterly GDP growth rate. Financial performance of investment banks in Kenya was the dependent variable which the study sought to explain and it was measured by return on assets of investment banks in the country on a quarterly basis. Secondary data was collected for a period of 10 years (January 2008 to December 2017) on a quarterly basis. The study employed a descriptive research design and a multiple linear regression model was used to analyze the relationship between the variables. Statistical package for social sciences version 22 was used for data analysis purposes. The results of the study produced R-square value of 0.344 which means that about 34.4 percent of the variation in financial performance of investment banks in Kenya can be explained by the four selected independent variables while 65.6 percent in the variation was associated with other factors not covered in this research. The study also found that the independent variables had a strong correlation with financial performance of investment banks (R=0.586). ANOVA results show that the F statistic was significant at 5% level with an F statistic of 4.585. Therefore the model was fit to explain financial performance of investment banks in Kenya. The results further revealed that individually, interest rate, inflation rates and exchange rates are significant determiners of financial performance of investment banks in Kenya while economic growth is not a significant determiner. This study recommends that there is need for policy makers to regulate the prevailing levels of interest rates, exchange rates and inflation rates as they have a significant effect on financial performance of investment banks in the country.