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THE RELATIONSHIP BETWEEN DERIVATIVES AND THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA


John Gitogo

Master of Business Administration, University Of Nairobi

John Karanja

Jomo Kenyatta University of Technology


Timothy Kasimolo

Master of Business Administration, University Of Nairobi


ABSTRACT

Increasing globalization of commerce is exposing firms to various financial risks, unrelated to their lines of business. Some of these risks are firm or situation specific with no ready-made exchange traded instruments to offset such risks. The management of these risks has created a new line of financial derivatives, the over-the-counter (OTC) derivatives. The objective of this study was to establish the relationship between derivatives and profitability of commercial banks in Kenya. A descriptive research design is concerned with describing characteristics of a problem. It is appropriate for this project because it helped to portray accurate profile of events and situations in the emerging derivative markets. Statistical package for social scientists (SPSS) software version 17 was used to analyze the data. Data was obtained through secondary sources. The secondary data was obtained from various financial journals; internet published financial statements and documents.  The population of the study consists of all the 43commercial banks in Kenya as at 31st December 2011, licensed and registered under the Banking Act. The study found that for commercial banks in Kenya to remain profitable they should have a put into consideration the several proxies for derivatives highlighted it this study. The study concludes that there exists relationship between derivatives and financial performance of commercial banks in Kenya. The total deposit was found to positively influence the profitability of commercial banks in Kenya. The study recommends that for commercial banks in Kenya to remain profitable they should have a put into consideration the several proxies for derivatives highlighted it this study. This will help in making decisions about credit policies, matching investments to objectives, asset allocation for institutions, and balancing risk against profitability.


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