Financial Risk Management and Profitability of Oil Marketing Firms in Kenya
Njeru, Stella Wanjiru
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Oil marketing firms have failed to consistently generate profits which has led to disruption of their marketing and distribution consequently leading to industrial actions, blacklisting by suppliers and even bankruptcy of the petroleum marketing firms. Profitability of oil marketing firms has been unstable yes the effect of financial risk management on such profitability remains unclear. Hence, the study sought to determine the effect of financial risk management on profitability of oil marketing firms in Kenya. The specific objectives were to determine the effect of credit risk management, exchange rate risk management, interest rate risk management and price risk management on profitability of oil marketing firms in Kenya. The theories that informed the study were: modern portfolio theory, agency theory, financial economic theory and profit maximization theory. This study used descriptive research design. The target population was 105 oil marketing firms that are registered by the Energy Regulatory Commission of Kenya as of 2018. Using a sample of 83 oil marketing firms, the study used both primary and secondary data. Primary data was collected using semi-structured questionnaires. Secondary data was collected from the financial statements of the firms for the years 2014-2018. Data analysis which involved descriptive and regression analysis were done with the help of Statistical Package for Social Sciences (SPSS). Data was presented using tables, charts and graphs. The study found a positive and significant effect of exchange rate risk management on profitability of oil marketing companies in Kenya (β=0.02, p=0.038). The study further found a positive and significant effect (β=0.023, 0.007) of credit risk management on profitability of oil marketing companies in Kenya. The study further found A positive and significant effect (β=0.13, p=0.001) of price risk management on profitability of oil marketing companies in Kenya. Interest rate risk management was not found to have a significant relationship with profitability (β=0.013, p=0.405). The study recommended that the financial managers of the oil marketing firms should put in practices and strategies to get involved in forward contracts, future contracts, options contracts and swaps to minimize the risk and exposure of exchange rates and interest rates in Kenya. Furthermore, the government and other agencies in country should set interest rates policies which are favorable to the businesses in Kenya. Regarding the price risks management, the management of oil companies should aim at getting involved in derivatives market to hedge against the volatility of prices. This will minimize the risks associated with price fluctuations hence improve on their profitability. The study further recommends that ERC should also develop control policies to reduce the effect of the volatile prices on oil marketing companies in order to prevent firm losses. The study further recommends that oil firms should be regularly transferring pricing and invoicing currency to avoid exchange risk and enhance firm profitability. The study further recommended that firms should employ leaching and lagging payments to minimize exchange risks and enhance firm profitability. Further, firms should have exposure netting to lower transaction costs and make regular settlements to reduce exchange risks and improve on profitability.