The Effect of Exchange Rate Fluctuation on The Profitability of Private Commercial Banks in Ethiopia
No Thumbnail Available
Date
2024-01-12
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
AAU
Abstract
The debate on exchange rate policy in developing countries like Ethiopia is ongoing due
to its impact on economic performance. The National Bank of Ethiopia (NBE) manages
international reserves and foreign exchange assets, aiming to maintain price stability.
The purpose of this study is to examine the experience of six Ethiopian private
commercial banks over the past twenty years, focusing on the effects of foreign exchange
rate fluctuations on their financial profitability (ROA). The study utilized secondary data
sources like audited financial statements of six private commercial banks and the
National Bank of Ethiopia's annual report used for a period of twenty years (2003-2022)
with the total of 120 observations. The study employed a quantitative research
methodology by using purposive sampling technique and explanatory type of research
design. The study analyzed panel data using descriptive statistics and multiple linear
regression techniques by using E-views version 10 econometric software. This
econometrics model was used to examine the relationship between foreign exchange
rates, inflation rates, gross domestic product, net interest margin, and bank size with
bank profitability indicator. The dependent variable return on assets (ROA) was used as
a measure of profitability. The major findings of the study show that foreign exchange
rate and inflation rate have statistically insignificant and positive relationship with
banks’ profitability. Further, the results from the panel regression show that, GDP have
a negative and statistically significant relationship with banks’ profitability. However,
the relationship for net interest margin and bank size is found to be positive relationship
and statistically significant. Based on the finding of the study, the researcher
recommends focusing and redesigns the banks together with significant bank specific
factor and macroeconomic factor of profitability of private commercials banks in
Ethiopia