Effects of Financial Risk Management on Financial Performance of Government Corporations in Kenya

Abstract

Risk management is considered by researchers as a yard stick for determining failure or success of government corporations. It has not been given much attention in recent times. This research work seeks to bring to light the need for government corporations to pay attention to the management of risk. It is obvious that the aim of every business is to maximize shareholder's wealth and acquire substantial profit either for expansion or to undertake new product development. Across the public sector, the most prominent area that erodes the mass of their profit is risk management (credit, market and operational). The problem of this study is to cram the causes of risk and how this can be anticipated and managed to improve performance of the government corporations. The general objective of this study is to examine the effects of financial risk management on financial performance of government corporations in Kenya. The specific objectives are credit risk, liquidity risk, foreign exchange risk and monetary factors affecting performance of government corporations. The target population is 139 officers of the government corporations. The sample size was44. Enterprise Risk management theory, capital asset pricing theory and arbitrage pricing theory have been used to explain the theoretical framework. A pilot study was carried out to refine the instrument. The quality and consistency of the survey will further be assessed using Cronbach's alpha. Data analysis was performed on a computer using Statistical Package for Social Science (SPSS Version 22) for Windows. Analysis was done using frequency counts, percentages, means and standard deviation, regression, correlation and the information generated was presented in form of graphs, charts and tables. The study results showed that there was an excellent response rate. Majority of the respondents have skills and knowledge and a better understanding of financial risk management. The study results revealed that credit risk inherent in the portfolio affected financial performance of government corporations in Kenya and further the study revealed that credit risk management in Government Corporation helped the same to remain viable and thus reduced leakages in the public finances.  The study revealed that there was a positive correlation between the independent variables and dependent variables. The study results revealed that price risks in commodity prices, interest rates and currency exchange rates affected cash flows of government corporations as well as causing risk exposure to government entities. The study further established that adequate management of government corporations in Kenya helped to reduce risks and maximizes on returns. The study revealed that Government Corporation were faced by unsystematic risks challenges and that management of market risks helped in stabilizing market effects. The study results revealed that liquidity risk arose when a given asset could not be traded quickly enough or sold at a required price to cover for financial shortfall the government corporations was facing. The R2 was about 52%. The study concluded that there was a relationship between financial risk management and performance of government corporations. The study recommended that government corporations should keep assets that are near liquid and that the government should employ hedging strategies to mitigate on risk.