Exchange Rate Risk and the Performance of Smes in Uganda

Abstract

This study sought to examine the exchange rate risk and the performance of SMEs in Nakawa division Sub County. The main objective of the study was to assess the effect of exchange rate risk on the performance of small and medium enterprises. The study had three objectives; to evaluate the relationship between industry characteristics and firm performance, to examine the relationship between exchange rate fluctuations and firm performance and to identify the most commonly quoted currency and its performance against the shilling. Exchange rate risk was varied in terms of economic exposure and industry characteristics whereas the performance of small and medium enterprises was varied in terms of sales growth and profitability. A survey research design was used to carry out the study. The samples were randomly selected from a population of 50 small and medium enterprises in which data collection methods such as interviews and questionnaires were used. Data was analyzed using SPSS to affirm a positive relationship between exchange rate risk and performance of small and medium enterprises.

The study found that there was a positive relationship between industry characteristics and firm performance. The findings of the study indicated that the SMEs were affected due to the fluctuations in the exchange rates and that the US Dollar is the most used foreign currency.

The study concludes that there is a positive relationship between exchange rate risk and performance of small and medium size firms in Uganda. Firms need techniques or approaches on Foreign exchange risk management as the results from the study show that foreign exchange risk shouldn’t be taken lightly.

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