Financial Risk Management and Financial Performance of Investment Firms Listed at Nairobi Securities Exchange, Kenya

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Date
2023-08
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IJSRP
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Financial performance is a crucial aspect for investment firms as it reflects their overall stability and communicates their financial well-being to investors. Some investment firms in Kenya are currently experiencing a decline in financial performance. This study focused on four dimensions of financial risk management (interest rate risk, exchange rate risk, inflation rate risk, and liquidity risk) to examine the effectiveness of risk management strategies in enhancing financial performance. The study equally assessed the moderating effect of firm size. Primary and secondary data sources were utilized, with a sample size of 40 respondents selected from the five listed investment firms. Data collection spanned eight years from 2014 to 2021. Multiple regression analysis, descriptive statistics, and diagnostic tests were employed. The study found that effective management of interest rate risk, exchange rate risk, inflation rate risk, and liquidity risk significantly affect financial performance. Additionally, firm size was found to moderate the relationship on financial performance. The study imparts valuable understandings regarding the significance of strategies for managing financial risks within investment firms. The study recommends management support for managing exchange rate risk through strategies like currency invoicing, leading and lagging, and exposure netting. It suggests the use of appropriate financial instruments such as forward rate agreements and options, as well as maintaining a diverse bond portfolio, to improve the management of interest rate risk. Effective liquidity risk management, including techniques such as cash flow forecasting and optimizing net working capital, is also highlighted. Managing inflation rate risk requires portfolio adjustment techniques, necessary spending adjustments, and continuous monitoring of changing inflation dynamics. Furthermore, the study recommends that policymakers in Kenya encourage investment firms to provide comprehensive risk disclosures in their financial reports. By implementing these recommendations, investment firms can enhance their financial performance and strengthen their risk management practices.
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