FINANCIAL DERIVATIVES USAGE AND FINANCIAL PERFORMANCE OF COMMERCIAL PARASTATALS LISTED IN THE NAIROBI SECURITIES EXCHANGE, KENYA

Abstract

The performance of commercial parastatals listed on the Nairobi Securities Exchange (NSE) is vital for Kenya's public sector stability and economic growth. These entities face significant financial risks from currency fluctuations, commodity price volatility, and interest rate changes. While financial derivatives are globally recognized tools for mitigating such risks, their adoption and impact within Kenyan state-owned enterprises remain underexplored. This study, therefore, analyzed the effect of financial derivatives usage on the financial performance of commercial parastatals listed on the NSE. Employing a descriptive research design, a census of all seven listed parastatals was studied, with secondary panel data collected from audited financial statements for the period 2019–2023. Financial performance, measured by Return on Assets (ROA), was regressed against the usage of currency, commodity, and interest rate derivatives. The regression analysis revealed nuanced effects. The usage of currency derivatives had an insignificant positive coefficient (0.0000235, p=0.504), while interest rate derivatives also showed an insignificant effect (0.0000131, p=0.871). Notably, commodity derivatives usage demonstrated a significant negative relationship with financial performance (coef. = -5.09e-06, p=0.017). The overall model was significant (Wald chi²=22.55, p=0.0001) but explained only 25.59% of the variance in performance. The study concludes that derivative usage has a limited and context-specific impact, with commodity hedging potentially being detrimental. It recommends that parastatal management implement rigorous, cost-benefit-driven derivative strategies, enhance transparency in risk disclosures, and that regulators facilitate targeted capacity building to ensure these sophisticated instruments effectively serve the entities' dual commercial and public mandates.

DOI: https://doi.org/10.5281/zenodo.17862040