Relationship Between Selected Macroeconomic Variables And The Financial Performance Of Investment Banks In Kenya

Abstract

Currently, investment banks in Kenya are facing a lot of challenges due to persistence losses. However, the available studies are inadequate to aid investment banks in overcoming these challenges in Kenya due to mixed findings, resulting in rising uncertainty on equity investments' performance, leading to massive losses among investment banks. This study, therefore, sought to model the relationship between inflation, GDP, interest rates, exchange rates, and financial performance of investment banks to strengthen market sentiment, guide investors and investment banks accordingly. Arbitrage pricing theory, Modern portfolio theory as well as classical economic theory (flow-oriented model) was used. A causal research design was adopted and targeted 16 investment banks authorized by CMA, and have been active from July 2006 to December 2019. Population census was employed to collect secondary data on the investment banks. Data on ROA was obtained from the individual investment banks, NSE, and CMA; data on the interest rate and the exchange rate were obtained from the Central Bank of Kenya, while that of Inflation and GDP was obtained from the Kenya National Bureau of Statistics. Data collected was analyzed using Stata version 12. Several techniques were applied to test the existence of dynamic relationships in time series variables. The study found that inflation has negative significant influence on financial performance of equity investments among investment banks in Kenya. Also, GDP has positive and significant influence on financial performance of equity investments among investment banks in Kenya. Interest rate was also found to have negative and significant influence on financial performance of equity investments among investment banks in Kenya. In addition, exchange rate has negative significant influence on financial performance of equity investments among investment banks in Kenya. The study therefore recommends any investor including financial investors to methodically analyze inflation trends and understand how it affects the company's financial performance. Investors must also be in a position to predict the future concerning inflation changes. It is also the responsibility of the government to put up policies and strategies that will help to reduce the rate of inflation and therefore encourage positive financial performance of investments.