The Nexus between Inflation Rate and Financial Performance: Evidence from Kenya's Building and Construction Industry

Abstract

Building and construction firms contributes immensely to a country’s economic development through job creation, promoting investment and enabling affordable housing. Thus, stakeholders are often preoccupied with the industry’s performance and developmental stages and pace. In Kenya, the building construction industry is currently characterized by decline in capital investment, implying an unhealthy industry. The industry has reported a steady reduction in growth in the last decade, as evidenced by the drop in value from Kshs.42.5 billion in 2011 to Kshs. 39.6 billion in 2020.As an illustration, the industry had a decline in return on investment (ROI), from 13.68% in 2011 to 4.79% in 2020. The decline in growth and ROI warrants a scholarly investigation. The study aims at establishing the effect of inflation rates on financial performance of building construction industry, Kenya. The researcher used correlational research design to investigate the relationship, direction and strength of variables. The study used quarterly data which were secondary sourced from industry records and publications for2011-2020, resulting in 40 data points. The findings were that a correlation existed among inflation rate and financial performance of and construction industry in Kenya. A unit increase in inflation rate resulted in a 0.424% increase in the financial performance of the construction industry. The positive t value of 4.005 and p ≤ 0.00 led to the conclusion on the positive directionality of the relationship. Research findings may be useful to industry’s private stakeholders and government agencies by enabling them to take the right policies, strategy and actionable steps or measures to enhance the relationships that would enhance financial performance. For instance, the government may work to increase the value of its currency and manage cost of goods (inflation)