Financial Risk Hedging Practices, Management Strategies and Debt Capacity: Theoretical Review

Abstract

There has been a rapid increase in nonfinancial firms leveraging their balance sheet, which seem to have constrained their borrowing space thus reducing the volume of credit uptake. Leverage has been rising since 2015 thus reducing the borrowing capacity of these companies. Majority of these firms are the top large borrowers therefore, corporate sector weaknesses across a majority of economic sectors largely restricted their ability to borrow and expand the asset side of banks. Kenya is heavily dependent on imports and hence its market aggregates are vulnerable to external shocks. Exchange, inflation and interest rates have been highly volatile in Kenya and this is not helped by the fact that most non-financial firms don’t have concrete policies on financial risk hedging therefore the need for hedging in those firms listed in Kenya. This paper offers a background on financial risk hedging practices, management strategies and debt capacity. It also provides a theoretical and empirical overview on the relationship between financial risk hedging practices, management strategies and debt capacity by reviewing other literature on the topic. This paper concludes that hedging practices, management strategies and debt capacity are related and therefore assessing firms’ debt capacity is crucial as it also affects firm performance.