Empirical Analysis of Foreign Exchange Risk Management and Financial Performance of Deposit Bank in Nigeria

Abstract

This study examined the relationship between foreign exchange market and financial performance of banks The objective of the study was to examine the relationship between official exchange rate, real exchange rate index, net demand for foreign exchange (NDX), and profitability and investments of banks. Quantitative research method was adopted. Secondary data on the variables of official exchange rate, real exchange rate index, net demand for foreign exchange (NDX), as independent variables, and profitability and investments of banks as dependent variables measuring financial performance, covering 2000 to 2021, were collected from the Central Bank of Nigeria (CBN) Statistical Bulletin 2021. These data were analysed using descriptive statistic techniques and multiple linear regression. From the findings, it was revealed that the exchange rate (EXR) has a positive and significant relationship with profitability and investments of banks in Nigeria; and real exchange rate index (RER) has a negative relationship with profitability of banks but a positive relationship with investments of banks in Nigeria. Also, net demand for foreign exchange (NDX) has a negative and significant relationship with profitability and investments of banks in Nigeria. Furthermore, official exchange rate, real exchange rate index, net demand for foreign exchange (NDX) explained 89.09% and 54.46% of the variations in the profitability and investments of banks in Nigeria. It was concluded that foreign exchange management in Nigeria poses mixed influences on the financial performance of banks in Nigeria. Recommendations made include the need for the Central Bank of Nigeria (CBN) to match supply of with the demand for foreign exchange especially the United States Dollars, to ensure adequate availability of foreign exchange in the market, and also the need for better government policies supporting deregulation in the determination of the exchange rate.

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