Financial Risk Hedging and Financial Performance of Commercial Banks Listed in Nairobi Securities Exchange, Kenya
DOI:
https://doi.org/10.53819/81018102t5346Abstract
In Kenya, financial institutions play a vital role in economic development by facilitating investments through receiving and lending funds, but they face market-driven financial risks that impact their performance, including a decline in Return on Assets over the past decade. This study aimed to determine the relationship between financial risk hedging techniques and the financial performance of Kenyan commercial banks listed on the Nairobi Securities Exchange (NSE). The study's specific objectives included forward contract, future contract, currency diversification of currencies, and swaps hence bank size is used as moderating variables. The agency theory, profit maximization theory, and enterprise risk management theory supported the study, providing a theoretical foundation for exploring the relationship between financial risk hedging and the financial performance of publicly traded commercial banks in Kenya. A descriptive correlational approach was adopted to target all publicly traded commercial banks in Kenya, with a census conducted to ensure comprehensive coverage. Secondary data was collected annually over a five-year period (2017–2021) from publications by the Nairobi Securities Exchange and the respective commercial banks, utilizing a structured data collection form. Diagnostic tests, including normality, multicollinearity, heteroscedasticity, and stationarity, were performed, confirming that the data met the required assumptions for analysis. The data was subsequently transformed to ensure that regression analysis could be conducted without producing spurious results. Descriptive statistics were summarized using means and standard deviations, while correlation and regression analyses were employed to test the hypotheses and draw meaningful conclusions. The correlation analysis revealed that using forward contracts as a hedging strategy has a strong positive and significant impact on financial performance. The futures, swaps, and currency diversifications also they had positive correlation against financial performance, and they had significant relationship. The regression study revealed a strong positive link between risk hedging and financial success, indicating a noteworthy correlation. Forward and future contracts were revealed to be risk-hedging approaches with significant effects on commercial bank financial performance, implying that currency diversification and swaps had a positive and significant effect on financial performance. Size had a strong favorable impact on the link between risk hedging and financial performance. The study recommends that bank executives and stakeholders should adopt robust risk management approaches and diversification strategies to enhance financial performance and stability in the banking sector. The Central Bank of Kenya (CBK) should regulate high-risk financial hedging products and require banks to disclose their use of financial derivatives, while the government should create supportive policies to promote these tools, ultimately strengthening financial institutions and fostering economic growth.
Keywords: Forward contracts, future contracts, currency diversity, swaps, bank size, financial performance, commercial banks, Kenya
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