EFFECT OF INTEREST RATE RISK MITIGATION ON THE PROFITABILITY OF FOREX BUREAUS IN NAIROBI, KENYA
Mohamud Ahmed Adow - Master of Business Administration (Finance), Jomo Kenyatta University of Agriculture and Technology, Kenya
Dr. George Ochiri (PhD) - Lecturer, Department of Business, Jomo Kenyatta University of Agriculture and Technology, Kenya
ABSTRACT
The focus of this study was to investigate the effect of interest rate risk mitigation techniques on the profitability of forex bureaus in Kenya. The objectives of the study were to assess the effect of hedging, payments netting, diversification and leading techniques on the profitability of forex bureaus in Nairobi. The study was grounded on Classical Theory of Interest Rates, Loanable Funds Theory and Transaction cost theory. This study employed a descriptive research design. The target population was the 74 forex bureaus in Nairobi County registered with the Kenya Forex & Remittance Association. Owing to the small number of the forex bureaus all of them (74) were included in the study. From each forex bureau one (1) respondent was picked from the finance department to participate in the study. This generated 74 respondents. The study collected primary data using a self-administered research questionnaire. Data collected was purely quantitative and it was analyzed by descriptive analysis. The descriptive statistical tools such as Statistical Package for Social Sciences (SPSS) and MS Excel helped the researcher to describe the data and determine the extent of the effect. The researcher further conducted a multiple regression analysis. The findings were presented using tables and figures. The study found that forex bureaus experience various interest rate risks in their operations to a great extent. The interest rate mitigation techniques affect the profitability of forex bureaus to a great extent. Forex bureaus adopted hedging techniques for mitigation of interest rate risks to a great extent. The hedging techniques applied in mitigation of interest rate risks affect the profitability of forex bureaus in Nairobi to a great extent. The forex bureaus in Nairobi adopted payment netting techniques for mitigation of interest rate risks to a moderate extent. Payments netting adopted in mitigation of interest rate risks was found to affect the performance of the forex bureaus to a moderate extent. The forex bureaus in Nairobi have adopted leading technique for mitigation of interest rate risks to a great extent. The forex bureaus adopted diversification strategy for mitigation of interest rate risks to a great extent and they affect the performance of forex bureaus to a great extent. The study concludes that interest rate mitigation techniques have a very significant effect on the profitability of forex bureaus, hedging techniques, payment netting techniques, leading technique and diversification techniques adopted for mitigation of interest rate risks have great contributions on the performance of forex bureaus in Nairobi. The forex bureaus in Nairobi should continue hedging since it effectively manages interest rate risks. The forex bureaus should start exploring avenues of enhancing payment netting techniques for better and accurate management of interest rate risk exposure. Forex bureaus should develop and implement effective and comprehensive leading procedures and information systems to manage and control interest rate risk in accordance with its interest rate risk policies.
