Interest Rate Risk and Financial Performance of Investment Banks in Kenya

Abstract

This paper addresses the ascendancy of interest rate risks on the performance of investment banks in Kenya. Methodologically the study was guided by positivist philosophy. The study applied an explanatory sequential mixed method design which allows for both quantitative and qualitative approaches. The population of the study was drawn from 16 investment banks operating in Kenya. Quantitative data was obtained from the annual financial statements of 16 investment banks operating in Kenya. The data was collected using data collection sheets for the years 2011 to 2019 to compute financial ratios. Primary data was analyzed qualitatively using thematic analysis to validate the quantitative data results (using an interview guide tool) from interviewees composed of managers in the investment banks, the Exchange, and the Regulator. Both descriptive and inferential analysis methods were employed in the analysis. The regression results reveal that interest rate risk by investment banks in Kenya has a low but positive and significant influence on the financial performance of investment banks in Kenya. From the empirical evidence and conclusion, investment banks should consider leveraging bank debts to improve performance. However, this should be accompanied by enhancing effective management of interest rates by buying short-term debt instruments such as treasury bills and bonds with short-term maturities, use of financial hedging instruments including forwards, swaps, futures, and options, as well as non-financial hedging methods such as cash flow netting.