Foreign Exchange Risk Management and Financial Performance of Firms in the Horticultural Industry in Nakuru County, Kenya

Abstract

In Kenya, the horticulture industry is a big revenue earner with the sector earning the country foreign exchange by exporting their products to various countries overseas. However, in the preceding 5 years to the study, horticultural firms had steadily declined hindering their sustainability and contribution to the economy. Moreover, studies that have been done to explore the effect of management of foreign exchange risk on the financial performance of companies, have presented a number of gaps which the current study sought to address. The study's main purpose was to ascertain the effect of management of foreign currency risk on the financial performance of the Kenyan horticultural sector. The specific objectives of the study were; to determine the effect of foreign exchange transaction risk management on financial performance of firms in horticulture industry in Kenya, to analyse the effect of foreign exchange economic risk management on financial performance of firms in horticulture industry in Kenya and to analyse the effect of foreign exchange translation risk management on financial performance of firms in horticulture industry in Kenya. The study was informed by Theory of Rational Expectations, International Fisher Effect Theory and New Institutional Economics Theory. To accomplish the objectives, the study employed an explanatory research design to analyze several horticultural enterprises for a period of three years (2019-2021). Primary data were obtained through a questionnaire that included questions that were both closed and open-ended, while secondary data were acquired using schedule tables. The population of interest for this study was 63 horticultural enterprises in Nakuru County. Due to the study population's small size, a census of all 63 enterprises was done. After collecting data, SPSS software version 21 was used to derive descriptive statistics and conduct multiple linear regression analysis. The averages and standard deviation were determined using descriptive statistics, and multiple linear regression analysis was applied to test the study's hypotheses. After that, the output was summarized in reports and frequency tables. Multiple regression results revealed the R2 value of 0.789, implying that foreign exchange risk management variables explained 78.9% of the variation in financial performance of the Kenyan horticultural sector. The study also showed that managing foreign currency transaction risk and economic risk had a significant effect on the transaction risk management had a significance value of 0.000<0.05 and a coefficient of 0.533; economic risk management had a significance value of 0.000 and a coefficient value of 0.461. However, foreign exchange translation risk management had a positive but insignificance relationship with financial performance as shown by p-value of 0.364 and a coefficient of 0.085. The study concludes that foreign exchange risk management has effect on the financial performance of firms in the horticultural industry in Kenya. The study thus recommends that horticultural enterprises should not rely on only one foreign currency hedging technique but should adopt a mix of the available hedging techniques to effectively manage their foreign currency risks.