CHAPTER FIVE

DISCUSSION OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.0 Introduction

The data was analyzed using description and percentages. This chapter therefore presents the discussion of the study in sub-chapters on the basis of the specific objectives set to achieve as analyzed in chapter four, the conclusion, and recommendations. 

5.1 Discussion of findings

The most common foreign exchange risk reduction strategies in the institutions from the findings are forward contracts and choice of currency in which company debt is denominated. 

The study also found that the use of operational means, particularly the matching of cash inflows and outflows and the matching assets and liabilities, had a significant impact on profitability of the. The findings of this study collaborate the findings of Blum, et. al (2001), who noted that companies mostly manage their foreign exchange exposure by maintaining assets in the currency in which the liabilities are denominated, that is, on-balance sheet hedging. The study concludes that given the significance of operational means on profitability, companies should seek ways to diversify their approaches for operational means to include all possible hedging techniques. 

According to study findings, the use of foreign exchange management strategies results in reduced foreign exchange exposure hence minimal losses, the firm often carries out foreign exchange exposure projections in different currencies. This is intended on reducing the level of risks thus, improving profitability of the financial institutions. Firm sets extensive budgeting systems to handle currency risk projections. This implies that the financial institutions are aware of risks in future, thus it sets budgetary systems that will meet currency future risks. This is in line Featherson, Littlefield and Mwangi (2006) who noted that foreign exchange risk arises when fluctuation in the relative values of currencies affects the competitive position or viability of an organization. Firms are exposed to foreign exchange risk if the results of their projects depend on future exchange rates and if exchange rate changes cannot be fully anticipated. Generally, companies are exposed to, Transaction exposure, Economic exposure and Translation exposure.

5.2 Conclusion

The study also concludes that the use of operational means (hedging), particularly the matching of cash inflows and outflows and the matching assets and liabilities, had a significant impact on profitability of microfinance institutions. This study did not find choice of invoicing currency being used by microfinance institutions to be a practice that was widely used to manage foreign exchange risk. 

The study concludes that foreign exchange practices effect on the profitability of institutions. Specifically, the study concludes that microfinance should aim at obtaining greater foreign revenues and profits through diversifying beyond local borders to the regional, African as well as world markets.  

The practical relevance of the research findings in foreign exchange risk management practices lies in the fact that, even though there are a number of financial hedging techniques such as use of derivatives that are available to manage foreign exchange risk, these measures tend to be rather too sophisticated and difficult to implement countries. The study therefore concludes that foreign exchange risk management practices have an effect on the profitability of microfinance institutions.

5.3 Recommendations

Organizations should not only cover foreign exchange risk alone but rather could be preceded by introductory contents on the practical market challenges facing the financial institutions. 

Financial institutions and generally all firms in Uganda with and without international operations effectively manage their risk to minimize their losses to exchange rate risk. 

The study also recommends that firms should look at instituting a sound risk management system and also needs to formulate their hedging strategy that suits their specific firm characteristics and exposures. 

The study recommends that financial institutions should explore avenues to enhance capacities within them for managing foreign exchange risk. They should explore the route of continued education for those in workplaces through short term training that should be very practical oriented. This could involve professional organizations for finance specialists, accountants and consultants. Such training should ideally be out of site because of the need to meet participants from diverse businesses and orientations for training and assessment to avoid internal interruptions. 

5.4 Suggestions for Further Research

Further studies should be carried out on;

• The effect of interest rates on profitability of financial institutions.
• The effect of credit risk management and financial risk management to the profitability of financial institutions in Uganda.

REFERENCES

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Allayannis, G., Ihrig, J., & Weston, J., (2001). Exchange-rate hedging: Financial vs. operational strategies. American Economic Review Papers and Proceedings, 91 (2), 391-395.

Athanasoglou, P. P., Brissimis, S. N. & Delis, M. D. (2008).Bank-specific, industry-specific and macroeconomic determinants of bank profitability.International Financial Markets Institutions & Money, 18, 121-136. 

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Stacy, O. M. and Williamson, R. G. (2010); Exchange rate exposure, use of foreign currency derivatives and corporate performance: a case of selected financial institutions in South Africa, University of South Africa Business School. South Africa.

APPENDICES

APPENDIX I: QUESTIONNAIRE

Dear respondent,

I am Kabejja Alice Nanyombiconducting a research on “Effects of Foreign Exchange on the Performance of Financial Institutions”. Therefore I kindly request you to spare a few minutes of your busy schedules to fill this questionnaire to enable me accomplish this task. Your honest and sincere responses are highly appreciated for academic purposes and shall be treated with utmost confidentiality. I thank you very much for your cooperation.

CHAPTER A: BACKGROUND INFORMATION 

(Please tick in the appropriate Box)

1. Sex: Male   Female 
2. Age:   20 – 30 years 31 – 40 years                41 – 50 years   

              51 – 60 years 60 and above    

3. Level of Education:

Primary Secondary Diploma Degree 

Post –graduate Others (specify) …………………………   

CHAPTER B: FOREIGN EXCHANGE PRACTICES USED

4. Does your organization have a policy for managing foreign exchange risk? 

Yes No  

5. What does your organization use as the financial means to manage foreign exchange fluctuation?

1. Forward contracts
2. Currency swaps
3. Currency options
4. Currency futures

Others specify………………………………………………………………………………….

6. How often has your organization used the following operational means to manage foreign exchange fluctuation?

Choice of invoicing currency

Matching cash inflows and outflows

Netting different currencies‘ exposures

Leading and lagging

Matching assets and liabilities

Other [please specify] …………………………………………………………………………

CHAPTER D: HOW FOREIGN EXCHANGE AFFECT FINANCIAL PROFITABILITY.

7. In this chapter, tick the best option by using strongly Agree (SA), agree (A), Not Sure (NS), Disagree (D).

CHAPTER D: CHALLENGES AND SOLUTIONS OF FOREGIN EXCHANGE

8. Does your institution face challenges as a result of foreign exchange?

Yes

No 

9. In your opinion, what challenges does the institution face as a result of foreign exchange? Please tick (√) the appropriate alternative where SA-strongly agree, A- agree, NS- Not Sure, SD-strongly disagree D-disagree 

10. In opinion, what do you can be done to minimize these challenges in your institution? Please tick (√) the appropriate alternative where SA-strongly agree, A- agree, NS- Not Sure, SD-strongly disagree D-disagree