The Effect of Market Risk on Financial Performance of Commercial Banks in Kenya

Jane Gathigia Muriithi; Willy Mwangi Muturi; Kennedy Munyua Waweru

doi:doi:10.11648/j.jfa.20160404.18

| Peer-Reviewed

The Effect of Market Risk on Financial Performance of Commercial Banks in Kenya

Jane Gathigia Muriithi, Willy Mwangi Muturi, Kennedy Munyua Waweru

Published in Journal of Finance and Accounting (Volume 4, Issue 4)

Received: 17 June 2016 Accepted: 7 July 2016 Published: 23 July 2016

Views: Downloads:

Download PDF

Share This Article

Twitter
Linked In
Facebook

Abstract

Despite the growth in the Kenyan banking sector, market risk still remains a major challenge. The objective of study was to assess the effect of market risk on financial performance of commercial banks in Kenya. The study covered the period between year 2005 and 2014. Market risk was measured by degree of financial leverage, interest rate risk and foreign exchange exposure while financial performance was measured by return on equity. The study used the balance sheets components and financial ratios for 43 registered commercial banks in Kenya. Panel data techniques of random effects, fixed effects estimation and generalized method of moments (GMM) were used to purge time–invariant unobserved firm specific effects and to mitigate potential endogeneity problems. The pairwise correlations between the variables were carried out. F- test was used to determine the significance of the regression while the coefficient of determination, within and between R², were used to determine how much variation in dependent variable is explained by independent variables. From the results financial leverage, interest rate and foreign exchange exposure have negative and significant relationship with bank profitability. Based on the study findings, it is recommended that commercial banks especially locally owned are required to consider finding ways of mitigating the market risks by use of financial instruments such as financial derivatives and be active in derivatives markets. These may reduce their interest rate risk and foreign currency risk exposure. The commercial banks are also required to monitor the financial leverage so as to reduce the financial risk.

Published in	Journal of Finance and Accounting (Volume 4, Issue 4)
DOI	10.11648/j.jfa.20160404.18
Page(s)	225-233
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2016. Published by Science Publishing Group

Keywords

Market Risk, Financial Performance, Commercial Banks, Degree of Financial Leverage, Interest Rate Risk, Foreign Exchange Exposure, Kenya

References

[1]	Aruwa, S. A. S., and Musa, A. O. 2014. Risk components and the financial performance of deposit money banks in Nigeria. International Journal of Social Sciences and Entrepreneurship, 1 (11), 514-522.
[2]	Bodnar, G., & Marston, R. (1996). 1995 Survey of derivatives usage by US non-financial firms. George Weiss Center for International Financial Research, Wharton School, University of Pennsylvania.
[3]	Cornelia, E. T. (2012). The problems and prospects of management of small-scale business in Nigeria. (Doctoral dissertation, Department of management, Faculty of Business adiministration, University of Nigeria Enugu campus).
[4]	Diebold, F. X., Schuermann, T., and Stroughhair, J. D (2000). Pitfalls and Opportunities in theUse of Extreme Value Theory in Risk Management. Journal of Risk Finance 1 (2), 30-35
[5]	Gachua, N. F. 2011. The effect of foreign exchange exposure on a Firm’s financial performance: a case of listed companies in Kenya (Doctoral dissertation, KCA University).
[6]	Galvao, A. F., Montes-Rojas, G., Sosa-Escudero, W., and Wang, L. 2013. Tests for skewness and kurtosis in the one-way error component model. Journal of Multivariate Analysis, 122, 35-52.
[7]	Hull, J. (2012). Risk Management and Financial Institutions, + Web Site (Vol. 733). John Wiley & Sons.
[8]	Jorion, P. (1997). Value at Risk: The New Benchmark in controlling market risk. Irwin, Chicago, 1, 997.
[9]	Koch, T., and MacDonald, S. 2014. Bank management. Nelson Education.
[10]	Lempert, R. (1966). Strategies of research design in the legal impact study: The control of plausible rival hypotheses. Law and Society Review, 1, 111-132.
[11]	Ngalawa, J., and Ngare, P. 2013. Interest rate risk management for commercial banks in Kenya. Journal of Economics and Finance (IOSR-JEF) e-ISSN: 2321-5933, Retrieved from; www.iosrjournals.org
[12]	Nimalathasan, B., and Pratheepkanth, P. 2012. Systematic Risk Management and Profitability: A Case Study of Selected Financial Institutions in Sri Lanka. Global Journal of Management and Business Research, 12 (17).
[13]	Roodman, D. (2006). How to do xtabond 2: An introduction to difference and system GMM in Stata. Center for Global Development working paper, (103).
[14]	Stimson, J. A. (1985). Regression in space and time: A statistical essay. American Journal of Political Science, 914-947.
[15]	Verbeek, M. (2004). A guide to modern econometrics. (2nd ed). Southern Gate, Chichester, West Sussex, England Hoboken, NJ: John Wiley & Sons.
[16]	Wachiaya, J. 2011. A survey of market risk management techniques by commercial banks in Kenya and their suitability in mitigating financial loss (Doctoral dissertation, University of Nairobi, Kenya).
[17]	Worzala, E. 1995. Currency risk and international property investments. Journal of Property valuation and Investment, 13 (5), 23-38.

Cite This Article

Plain Text BibTeX RIS

APA Style

Jane Gathigia Muriithi, Willy Mwangi Muturi, Kennedy Munyua Waweru. (2016). The Effect of Market Risk on Financial Performance of Commercial Banks in Kenya. Journal of Finance and Accounting, 4(4), 225-233. https://doi.org/10.11648/j.jfa.20160404.18

Copy | Download

ACS Style

Jane Gathigia Muriithi; Willy Mwangi Muturi; Kennedy Munyua Waweru. The Effect of Market Risk on Financial Performance of Commercial Banks in Kenya. J. Finance Account. 2016, 4(4), 225-233. doi: 10.11648/j.jfa.20160404.18

Copy | Download

AMA Style

Jane Gathigia Muriithi, Willy Mwangi Muturi, Kennedy Munyua Waweru. The Effect of Market Risk on Financial Performance of Commercial Banks in Kenya. J Finance Account. 2016;4(4):225-233. doi: 10.11648/j.jfa.20160404.18

Copy | Download

@article{10.11648/j.jfa.20160404.18,
  author = {Jane Gathigia Muriithi and Willy Mwangi Muturi and Kennedy Munyua Waweru},
  title = {The Effect of Market Risk on Financial Performance of Commercial Banks in Kenya},
  journal = {Journal of Finance and Accounting},
  volume = {4},
  number = {4},
  pages = {225-233},
  doi = {10.11648/j.jfa.20160404.18},
  url = {https://doi.org/10.11648/j.jfa.20160404.18},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20160404.18},
  abstract = {Despite the growth in the Kenyan banking sector, market risk still remains a major challenge. The objective of study was to assess the effect of market risk on financial performance of commercial banks in Kenya. The study covered the period between year 2005 and 2014. Market risk was measured by degree of financial leverage, interest rate risk and foreign exchange exposure while financial performance was measured by return on equity. The study used the balance sheets components and financial ratios for 43 registered commercial banks in Kenya. Panel data techniques of random effects, fixed effects estimation and generalized method of moments (GMM) were used to purge time–invariant unobserved firm specific effects and to mitigate potential endogeneity problems. The pairwise correlations between the variables were carried out. F- test was used to determine the significance of the regression while the coefficient of determination, within and between R2, were used to determine how much variation in dependent variable is explained by independent variables. From the results financial leverage, interest rate and foreign exchange exposure have negative and significant relationship with bank profitability. Based on the study findings, it is recommended that commercial banks especially locally owned are required to consider finding ways of mitigating the market risks by use of financial instruments such as financial derivatives and be active in derivatives markets. These may reduce their interest rate risk and foreign currency risk exposure. The commercial banks are also required to monitor the financial leverage so as to reduce the financial risk.},
 year = {2016}
}

Copy | Download

TY - JOUR
T1 - The Effect of Market Risk on Financial Performance of Commercial Banks in Kenya
AU - Jane Gathigia Muriithi
AU - Willy Mwangi Muturi
AU - Kennedy Munyua Waweru
Y1 - 2016/07/23
PY - 2016
N1 - https://doi.org/10.11648/j.jfa.20160404.18
DO - 10.11648/j.jfa.20160404.18
T2 - Journal of Finance and Accounting
JF - Journal of Finance and Accounting
JO - Journal of Finance and Accounting
SP - 225
EP - 233
PB - Science Publishing Group
SN - 2330-7323
UR - https://doi.org/10.11648/j.jfa.20160404.18
AB - Despite the growth in the Kenyan banking sector, market risk still remains a major challenge. The objective of study was to assess the effect of market risk on financial performance of commercial banks in Kenya. The study covered the period between year 2005 and 2014. Market risk was measured by degree of financial leverage, interest rate risk and foreign exchange exposure while financial performance was measured by return on equity. The study used the balance sheets components and financial ratios for 43 registered commercial banks in Kenya. Panel data techniques of random effects, fixed effects estimation and generalized method of moments (GMM) were used to purge time–invariant unobserved firm specific effects and to mitigate potential endogeneity problems. The pairwise correlations between the variables were carried out. F- test was used to determine the significance of the regression while the coefficient of determination, within and between R2, were used to determine how much variation in dependent variable is explained by independent variables. From the results financial leverage, interest rate and foreign exchange exposure have negative and significant relationship with bank profitability. Based on the study findings, it is recommended that commercial banks especially locally owned are required to consider finding ways of mitigating the market risks by use of financial instruments such as financial derivatives and be active in derivatives markets. These may reduce their interest rate risk and foreign currency risk exposure. The commercial banks are also required to monitor the financial leverage so as to reduce the financial risk.
VL - 4
IS - 4
ER -

Copy | Download

Author Information

Jane Gathigia Muriithi

Department of Economic, Accounting and Finance, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
Willy Mwangi Muturi

Department of Economic, Accounting and Finance, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
Kennedy Munyua Waweru

Department of Finance and Accounting, Co-operative University College of Kenya, Nairobi, Kenya

Download PDF

Sections

Plain Text BibTeX RIS

APA Style

Jane Gathigia Muriithi, Willy Mwangi Muturi, Kennedy Munyua Waweru. (2016). The Effect of Market Risk on Financial Performance of Commercial Banks in Kenya. Journal of Finance and Accounting, 4(4), 225-233. https://doi.org/10.11648/j.jfa.20160404.18

Copy | Download

ACS Style

Jane Gathigia Muriithi; Willy Mwangi Muturi; Kennedy Munyua Waweru. The Effect of Market Risk on Financial Performance of Commercial Banks in Kenya. J. Finance Account. 2016, 4(4), 225-233. doi: 10.11648/j.jfa.20160404.18

Copy | Download

AMA Style

Jane Gathigia Muriithi, Willy Mwangi Muturi, Kennedy Munyua Waweru. The Effect of Market Risk on Financial Performance of Commercial Banks in Kenya. J Finance Account. 2016;4(4):225-233. doi: 10.11648/j.jfa.20160404.18

Copy | Download

@article{10.11648/j.jfa.20160404.18,
  author = {Jane Gathigia Muriithi and Willy Mwangi Muturi and Kennedy Munyua Waweru},
  title = {The Effect of Market Risk on Financial Performance of Commercial Banks in Kenya},
  journal = {Journal of Finance and Accounting},
  volume = {4},
  number = {4},
  pages = {225-233},
  doi = {10.11648/j.jfa.20160404.18},
  url = {https://doi.org/10.11648/j.jfa.20160404.18},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20160404.18},
  abstract = {Despite the growth in the Kenyan banking sector, market risk still remains a major challenge. The objective of study was to assess the effect of market risk on financial performance of commercial banks in Kenya. The study covered the period between year 2005 and 2014. Market risk was measured by degree of financial leverage, interest rate risk and foreign exchange exposure while financial performance was measured by return on equity. The study used the balance sheets components and financial ratios for 43 registered commercial banks in Kenya. Panel data techniques of random effects, fixed effects estimation and generalized method of moments (GMM) were used to purge time–invariant unobserved firm specific effects and to mitigate potential endogeneity problems. The pairwise correlations between the variables were carried out. F- test was used to determine the significance of the regression while the coefficient of determination, within and between R2, were used to determine how much variation in dependent variable is explained by independent variables. From the results financial leverage, interest rate and foreign exchange exposure have negative and significant relationship with bank profitability. Based on the study findings, it is recommended that commercial banks especially locally owned are required to consider finding ways of mitigating the market risks by use of financial instruments such as financial derivatives and be active in derivatives markets. These may reduce their interest rate risk and foreign currency risk exposure. The commercial banks are also required to monitor the financial leverage so as to reduce the financial risk.},
 year = {2016}
}

Copy | Download