The Effects of Foreign Currency Fluctuation on Profitability: A study on selected Ethiopian private banks

Abstract

Exchange rate plays an increasingly significant role in banking industry in Ethiopia as it directly and indirectly affects domestic selling price level, profitability, allocation of resources and investment decision in the industry. The fluctuation or volatility in the exchange rate has piqued the public's interest, especially among importers, who claim that the weakening birr is eroding their competitiveness. The objective of this study is to determine the effect of foreign currency exchange rate fluctuation on the bank profitability in Ethiopia. Secondary data were collected from the National Bank of Ethiopia and banks Financial Report. Regression analysis was done for the periods to determine the effect of foreign exchange rate fluctuation on the private banks performance. Financial institutions including intermediary commercial banks are more exposed to the effect of currency fluctuation or exchange rate fluctuation. It stems primarily from the effect of exchange rates on bank clients' business and the economy as a whole. As a result, understanding the overall effect of foreign currency fluctuation on bank profitability is critical for devising an effective coping strategy. As a result, the aim of this study is to investigate the effect of foreign currency fluctuation on the profitability (ROA) of commercial banks in Ethiopia using a balanced panel data set covering of fourteen Ethiopian private banks over the period of 2012/13-2019/20 G.C. The collected data were quantitatively analyzed using STATA 14 software. The foreign currency fluctuation (USD) positively and (SEK) negatively affects the firm financial performance. Thus, the study concludes that the most foreign currencies fluctuation positively affect financial performance of banks in Ethiopia. From the findings and conclusion, the study recommends that the issues related to foreign currency fluctuation should always be taken in to account in efforts to improve private commercial banks financial performance