EVALUATION OF THE EFFECT OF FOREIGN EXCHANGE MARKET INSTRUMENTS ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN MERU COUNTY, KENYA.

Abstract

Purpose: To investigate the effect of foreign exchange market instruments on financial performance of commercial banks in Meru County, Kenya

Methodology: Descriptive survey research design was used when collecting data using closed-ended questionnaires from 15 commercial banks in Meru County Kenya. The respondents were selected using stratified sampling method to have 4 units of observation such as banking operations, business development, personal banking and marketing operations. Once the strata were derived, the study used Krejcie & Morgan (1970) sampling formular to get the sampled respondents. This resulted to a sample of 55 banking operations officers, 45 business development officers, 55 personal banking officers and 72 marketing operations officers. The study further issued closed questionnaires and analysis from secondary data reports such as statement of affairs and income statements. The pre-test was done on two commercial banks in Isiolo-County. The banks were Kenya Commercial Bank and Consolidated bank. This was because Isiolo County was a county that was well developed with banks that were actively engaged in banking operations. The respondents were 6 banking operations officers, 5 business development officers, 6 personal banking officers and 9 marketing operations officers. The data from questionnaires were analyzed using descriptive statistics such as median, frequencies and percentage. Data was presented using tables.  SPSS version 24 was used to analyze the data which was presented using tables. Analysis of documents was done using the ratio analysis technique.

Results: The results on the questionnaires indicate that most respondents agreed that there were several training forums to clients on issues pertaining foreign exchange market (mean of 3.01). However, most respondents had a contrary opinion on the government support to always maintain the value of a shilling vis-à-vis an US dollar (mean of 2.34). Additionally, the respondents indicated that the bank did not provide all information pertaining to foreign exchange (mean of 2.47). Foreign exchange market instruments had an R value of 0.756 and R-square of 0.572. This indicated that foreign exchange market instruments had an 57.2% influence on financial performance while 42.8% were on other factors not investigated in this study. The significance level was 0.000 hence below than 0.05. Therefore, the results meant that the study rejected the null hypothesis that there is no Effects of foreign exchange market instruments and financial performance of commercial banks in Meru County, Kenya.

Unique contribution to theory, policy and practice: Foreign exchange market instruments were key determinants on financial performance of a bank as long as currencies are involved. The more a bank invests in acquiring qualified personnel, updated ICT systems and reliable communication channels, the easier it will be to improve their performance. Nevertheless, this has not been the case since most banks do not have reliable systems that could support foreign exchange operation without necessarily exposing the bank to cyber fraud when seeking and consistent losses due to price volatility.