The Impact of Foreign Exchange Rate on The Financial Performance of Private Commercial Banks in Ethiopia
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Date
2023-10-10
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Publisher
AAU
Abstract
The purpose of this study is to investigate the impact of foreign exchange rates on the financial
performance of private commercial banks in Ethiopia, with Return on Equity (ROE) as the
dependent variable. The independent variables include foreign exchange rates, interest rate
spread, inflation rate, and GDP. The data for this research was collected from audited financial
reports of national bank of Ethiopia over a specific time period. The data was tested and
analyzed using random effect regression analysis to determine the relationship between foreign
exchange rates and ROE and tested for using the assumption of CLRM. Quantitative research
methods were employed, and data from eight private commercial banks were collected over a
22-year period from 2001 to 2022 for the analysis. The research utilized Stata 14.2 econometric
software to assist in analyzing the data. The finding of this study was providing insights into how
foreign exchange rates influence the financial performance of private commercial banks in
Ethiopia. The results of this research contribute to the existing literature on the effects of foreign
exchange rates on bank profitability and financial performance. the study found a negative
relationship between foreign exchange rates and bank performance, as well as a positive
relationship between inflation and performance. There was no significant relationship observed
between inflation rates and financial performance and also significant relationship between
interest rate spread and financial performance. Recommendations include increasing exports
and foreign direct investment to stabilize the value of the domestic currency, as well as
implementing strategies to manage foreign exchange risks in the banking sector in Ethiopia.
Some phrases commonly used to discuss this topic include:- Currency exchange rates, economic
evaluations, and the banking sector in Ethiopia.