Financial Instruments, Inflation Rates and Performance of Commercial Banks Listed in Nairobi Securities Exchange

Abstract

Financial instruments are used on a wider scale mainly due to the global financial crisis. These tools have played a central role in averting financial risks in many countries for a long time. The banking sector’ earnings fell drastically in 2020. ROA was 2.0% in year 2020 while in 2019 it was 3.2%. Such decline was contributed by: an increase in loan loss provisions, decline in asset quality and interest rate cuts (SBI, 2021). In principle, this study assessed how financial instruments and performance of listed banks in NSE as moderated by inflation rates. The specific objectives of this study were; to determine the effect of equity securities on financial performance of Commercial banks listed in Nairobi Securities Exchange, to determine the effect of debt securities on financial performance of Commercial banks listed in Nairobi Securities Exchange. To determine the effect of bonds on financial performance of Commercial banks listed in Nairobi Securities Exchange and to determine the moderating role of inflation rates on the relationship between financial instruments and financial performance of Commercial banks listed in Nairobi Securities Exchange. It was supported by the trade-off theory, pecking order theory and preferred habitat theory. The study utilized a descriptive design. The population comprised 11 Commercial banks listed on the Nairobi Security Exchange. This study also embraced simple random sampling techniques to pick a sample size of 10 listed commercial banks. Second hand data was gathered by a sheet from financial reports for 10 years from 2011-2020. Descriptive statistical techniques like standard deviation, maximum, minimum and mean and, inferential statistical methods such as correlation and panel data regression analysis were utilized to process. The findings were presented in figures and tables. It was identified that equity securities had a positive and significant interrelationship with financial performance of Commercial banks listed at NSE. It was concluded that, debt securities had a positive and significant correlation on performance of listed Commercial banks in Nairobi Securities Exchange. It was recommended that listed Commercial banks at Nairobi Securities Exchange ought to invest more on bonds. Bonds issuance by the government is used whenever it wants to raise money at a risk-free rate. Investment in bonds ensures that they receive periodic interest payment until maturity when the principal amount is to be paid. This will enhance their financial performance by improving their profits and cash flows.