EFFECT OF MARKET MAKER LIQUIDITY DIMENSIONS ON THE USE OF FINANCIAL DERIVATIVES IN INTEREST RATE RISK MANAGEMENT AMONG COMMERCIAL BANKS IN KENYA

Mary Zeresh Otsyula

College of Human Resource and Development,

Jomo Kenyatta University of Agriculture and Technology

P. O. Box 62000, 00200 Nairobi, Kenya

Corresponding Author email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Dr. Florence S. Memba Ph.D.

College of Human Resource and Development,

Jomo Kenyatta University of Agriculture and Technology

Professor. Willy Muturi Ph.D.

College of Human Resource and Development,

Jomo Kenyatta University of Agriculture and Technology

CITATION: Otsyula, M., Z., Memba, F., S., Muturi,W. (2019) Effect Of Market Maker Liquidity Dimensions On The Use Of Financial Derivatives In Interest Rate Risk Management Among Commercial Banks In Kenya. International Journal of Economics and Finance. Vol. 8 (5) pp 15 - 38

ABSTRACT

The prime objective of this research was to establish the effect of market maker liquidity dimensions on the use of financial derivatives parameters in interest rate risk management among commercial banks in Kenya. In order to request information, this research incorporated a descriptive research design. The study gathered data from 108 market makers from 39 commercial banks using email or drop - and - pick method questionnaires. Employing the use of statistical package (SPSS version 21), the analysis of data was undertaken using descriptive (percentages, frequencies and means) as well as inferential statistics for instance Pearson correlation and also regression analysis towards the determination of the relationship connecting the variables (that is the independent and dependent variables). Based on the study’s findings, it is clear that in managing interest rate risk using financial derivatives, market resilience and market breadth were more important. According to the study, market immediacy and interest rate risk management using financial derivatives, were positively associated. The depth and breadth of the market have a positive and significant effect on the management of interest rate risks using financial Derivatives. Market resiliency was found to have an insignificant positive effect on the use of financial Derivatives on interest rate risk management. The study also reveals a positive correlation between market tightness and risk management of interest rates using financial derivatives. The study recommends that Kenya's commercial banks should increase their active participation in the market for interest rate derivatives as the results of the study have shown a huge presence of market makers. The government should consider strengthening the market makers system in the country. The study also recommends that market manufacturers in commercial banks need to increase the use electronic trading platforms such as Bloomberg and Citivelocity to provide core services to support the real economy.

Key Words: Market Immediacy, Market Depth, Market Breadth, Market Resiliency, Market Tightness, Trading Platforms, Interest Rate Risk Management and Financial Derivatives

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