Exchange rate risk and financial performance of commercial banks in Kenya

Abstract

The ever-growing amalgamation of the global economy combined with the amplified explosiveness of foreign exchange rates has made management of currency risks very critical to grow shareholder wealth by stabilizing organization income streams. This study sought to determine the effect of exchange rate risk on the financial performance of commercial banks in Kenya. The study adopted positivist research philosophy. Explanatory sequential research design was used. Both primary and secondary data were collected from 38 commercial banks. Primary data was collected through a structured questionnaire from 386 senior bank managers while secondary data covered the period 2014-2023 for all the 38 commercial banks. Respondents agreed that exchange rate risk affects bank performance (mean 3.55), with regression showing a significant positive effect on financial performance (β=0.212; p<0.05 for primary data as well as for secondary data (β=12.88; p<0.05). It was concluded that exchange rate risk significantly affects financial performance of commercial banks. The study recommends the adoption of comprehensive exchange rate risk management strategies that include use of financial derivatives such as forward contracts, swaps and options to hedge against currency fluctuation. It is also vital for banks to diversify their foreign currency portfolios and establish robust internal policies for evaluating foreign exchange exposure.