TRADE FINANCING AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS LISTED IN NAIROBI SECURITIES EXCHANGE, KENYA

Mark Godfrey Orubia, Dr. Richard Ngali, Dr. Joshua Matanda

Abstract


Trade finance has evolved significantly from traditional, cumbersome transaction methods to more structured and efficient financial instruments. Historically, global trade was predominantly conducted on an open account basis, where buyers received goods on credit and made payments later. However, this approach posed significant challenges, particularly in fostering trust between geographically dispersed trading partners. To mitigate these risks, banks and financial institutions introduced trade financing instruments to facilitate secure and reliable transactions. This study aimed to examine the effect of trade financing on the financial performance of commercial banks listed on the Nairobi Securities Exchange. Specifically, it assessed the effect of letters of credit and bank guarantees on banks’ financial outcomes. The research was anchored on Modern Portfolio Theory (MPT) and the Balanced Scorecard, employing a cross-sectional descriptive research design. The study targeted all ten listed commercial banks in Kenya, utilizing secondary data spanning six years (2018–2023). Data analysis was conducted using the Statistical software Statistics and Data (STATA), with descriptive statistics (means, frequencies, and standard deviations) summarizing the data, while Pearson’s correlation coefficient and panel regression analysis facilitated inferential analysis. The findings revealed strong positive correlations between financial performance and letters of credit (r = 0.569) and bank guarantees (r = 0.599), suggesting that higher utilization of these trade finance instruments enhances financial outcomes. Additionally, regression analysis confirmed that letters of credit (β = 0.319) and bank guarantees (β = 0.202), significantly (p-values < 0.05) influence financial performance. Based on these findings, it is recommended that commercial banks in Kenya optimize their use of trade financing instruments, develop tailored financial solutions to support businesses, and collaborate with regulatory authorities to improve access to trade finance. These insights underscore the strategic role of trade financing in strengthening the financial performance of commercial banks and provide valuable guidance for policymakers and banking professionals in enhancing trade finance mechanisms for sustainable growth and profitability.

Key Words: Trade financing, financial performance, letters of credit, banks’ guarantee


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References


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