The effect of foreign exchange risk on project management: a case of projects funded through Kenya Medical Research Institute
The general objective of this research study was to establish the effects of foreign exchange risk on project management in KEMRI with two specific objectives namely; to establish the determinants for exposure to exchange rate risk on projects funded through KEMRI and to explore the effects of exchange rate fluctuation in the medium term period of a project timing, scope and quality. This research was a descriptive case study of forty five (45) donor funded projects financed in currencies other than the Kenya Shilling through KEMRI. The study population was all foreign funded KEMRI projects in the period 2000 to 2012 (n=363). Quantitative primary data was analyzed from a sample size of forty five projects picked through simple random sampling. Self-administered questionnaires were delivered to key respondents or project officers who were believed to have knowledge about the projects they were representing using 'drop and pick later' technique. Descriptive statistics were used to analyze the data. The findings in this study were consistent with theoretical literature on the effects of foreign exchange rate risk on project management as documented in CPA Australia Ltd (2009) and UNHCR (2005). Empirically the study was consistent with findings from Ngugi (2006). The independent variables could explain 87.7 % of the exposure to foreign exchange rate risk on projects funded through KEMRI, meaning that 12.3 % could be explained by other factors that affect foreign exchange rate risk but not related to these variables. The results also revealed that financing time lag or delays in release of funds by donors accounted for 91.1 % of the total exposure with inflation and interest rates accounting for 91.1% as well, variation of budget rate from actual rate of exchange accounted for 80%, monthly revaluation explaining 71.1%, conversion rates accounting for 68.9%, management support at 68.8%, lack of dedication at 62.2% and lastly exchange rate fluctuation at 60% of the total exposure if the variables were run individually. In addition to variables used in Ngugi (2006) study, three other variables were introduced namely; inflation, interest rates and budget rates. The inclusion of these additional independent variables accounted for the rise in percentage from 81.2% in Ngugi’s study to 87.7% in this study. The study recommends that more research be done on the effects of foreign rate risk on project management and focus on the management strategies to curb the negative effect on project management especially in the absence of any hedging strategies. Additionally as the funding trend grows in terms of volumes in grants, it would be wise for donors to embrace foreign exchange risk management techniques to cushion projects from the negative effect of exchange rate fluctuations. Risk management being an integral part of funding and project management should be incorporated in the process of grant applications in addition to formulating benchmarks for decision making in the world of non-profit making organizations. This will ensure that losses incurred by projects through foreign exchange transactions are minimized.