An investigation of asset liability management practices in Kenya Commercial Banks
Macharia, Irungu Peter
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Risk management practices in commercial banks are commonly known as asset liability management and it remains critical in ensuring safety of depositors' funds as well as investors' stake. Asset liability management is arequirement by the Central Banks of any country in order to ensure full compliance to the set risk management guidelines. This study was designed to establish the asset/liability management practices by Commercial Banks in Kenya and to find out the extent of asset-liability management by these banks. The study will be important to commercial banks, scholars and it will contribute more knowledge to the existing information on asset liability management. The population under study comprised of all Heads of Treasury Operations of the 43 Commercial Banks in Kenya. Census study was used because the population was relatively small for sampling and gave a better representation of the various risk management practices employed by various commercial banks as well as their asset liability management practices. Each respondent filled and submitted a self administered questionnaire that was dropped and picked later. The questionnaire responses were summarized and the results analyzed using Statistical data analysis programme (SPSS) to describe the relationship between the dependent and the independent variables. Findings were presented by way of charts, graphs and tables. Several deductions were drawn from the findings. These included: responding banks employed both conventional and bank-specific asset liability management practices. Most banks considered credit/default risk to be the most critical of all financial risk exposures though some empirical evidence shows that foreign exchange risk is the most critical risk for most firms. Majority of the banks did not find the Kenyan currency market to be information efficient: speculation and forecasting techniques were extensively used by most of them. Regular and systematic appraisal of asset/liability management policies was a common practice amongst most banks. Most banks also indicated that their asset/liability management systems were governed by guidelines set by the management board which is a cross functional outfit covering all the major functions in the bank this showed that ALM is a highly strategic issue in the banks Most banks, regardless of their size, extensively utilized most of the conventional hedging instruments. Micro hedge approach, accounting and economic exposure measurement strategies, natural hedging and diversification were some of the most utilized strategies. Some hedging practices were considered by most banks to be more important than others. These included use of forward contracts and foreign currency options as hedging instruments, and use of matching/natural hedging strategy.