Relationship between Financial Derivatives and Financial Performance of Selected Listed Commercial Banks in Kenya

Abstract

Market globalization has tremendously increased exposing banks into different forms of financial risks. Financial risks when inadequately managed may cause the financial performance of commercial banks to decline. Managing these financial risks amongest other ways, involve creating tradable instruments such as derivatives to offset them. This study examined the relationship between financial derivatives and financial performance of selected listed commercial banks in Kenya. The objectives of the study were to assess the influence of swaps, options, forwards and futures on financial performance of listed commercial banks in Kenya. Four theories that were espoused in this study included risk management theory, capital irreverence theory, financial intermediation theory and normative decision-making theory to guide swaps, options, forwards and futures respectively. Descriptive research design was used when collecting data using closed ended questionnaires from the selected 11 listed commercial banks in Kenya. Required data was provided by risk managers, operations managers, operations managers and marketing managers to participate in the study. Census sampling technique was used due to the small target population hence every listed commercial bank was included. To ensure validity and reliability, pre-test questionnaires was sent to six respondents who were selected by simple random method of sampling from the non-listed banking sector. The six respondents were junior officers in risk, credit, operations and marketing departments of non-listed commercial banks in Meru Kenya. The collected data was then coded using the SPSS 24.0 software. The coded data was analyzed quantitatively using the descriptive statistics such as mean, percentage and standard deviation while inferential statistics such as person correlation analysis were used. Linear regression models were also used. Further on, the tables, graphs were used when indicating the analysis results. The study indicated that there was a linear relationship between financial derivatives and financial performance of selected listed commercial banks in Kenya. The study discovered that sales of swaps contracts was low and there were increasing costs associated with these kind of derivatives hence reducing profits. In addition, since most forwards take a long time to mature, when banks were restructuring their computerized systems, they lost client’s contact information through misplacement or not correctly capturing in the new system. These results proved that the banks lacked enough qualified staff to amicably handle all issues and report on time. In addition, it was evident that the banks did not have complete infrastructure set up that is required to run financial derivatives such as futures. The study recommends that there should be a aggressive marketing initiatives in the banking sectors to enable incorporation of more clients into derivatives contracts. `