Exchange Rate Volatility and Banks Performance: Evidence from Nigeria
Abstract
This study empirically examined the effect of exchange rate fluctuation on banks performance in Nigeria covering the period of ten years between 2005 and 2014. We measured exchange rate fluctuation by return average annual values of US dollar to Naira for the ten-year period. We tested our exchange rate for volatility (ARCH LM test) proving its fluctuating nature. Hausman Test was conducted for fixed and random effect preferred option. We found that exchange rates fluctuation had an insignificant effect on banks profitability using ROA as a measure while exchange rates fluctuation had a significant negative effect on banks liquidity using LDR as a measure. Therefore, we concluded that the effect of exchange rates fluctuation on banks performance is subjective on the specific measure of performance used in the research. However, our results suggest that further depreciation in the value of naira will lead to a fall in the liquidity position of the banks. As such we recommend that adequate care must be taken in establishing policies within the bank to hedge against foreign exchange risk. Furthermore, the banking sector is a vital part of the Nigerian economy and has contributed immensely to the overall GDP; we therefore suggest that the monetary authorities of Nigeria should re-assess its trade policies to incorporate strategies (high import duties, Pioneer Status, Preservation of the value of the domestic currency, maintenance of favourable external reserves position and ensuring external balance without compromising the need for internal balance) with the sole aim of enhancing naira value.
Keywords
Exchange rate; Volatility; Fluctuation; Bank Performance; ARCH LM Test.
References
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