The Impact of Exchange Rate on the Profitability of Commercial Banks in Ethiopia
No Thumbnail Available
Date
2016-06
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Addis Ababa University
Abstract
As a financial intermediary, commercial banks are more exposed to the effect of exchange rate.
Exchange rate can affect bank performance both directly and indirectly. The direct effect is
easy to identify and can be easily managed. However, the indirect effect of exchange rate on
the profitability of commercial banks is very subtle. Basically, it emanates from the impact of
exchange rate on the business of bank clients and the economy in general. Therefore, knowing
the aggregate impact of exchange rate on the profitability of banks is very crucial to device an
appropriate coping strategy. This study, is therefore seek to examine the composite impact of
exchange rate on the profitability (ROE) of commercial banks in Ethiopia using a balanced
panel data set of banks over the period of 2000-2014. Furthermore, this study tried to
determine how exchange rate affects the growth of bank loan with the intension to identify
whether one of the indirect effect of exchange rate on bank profitability is through its effects on
loan growth. The empirical findings of this study suggest that exchange rate has statistically
significant negative impact on the profitability of commercial banks in Ethiopia. The result of
the model estimated to examine the impact of exchange rate on loan growth of commercial
banks in Ethiopia showed that exchange rate has statistically significant positive impact on the
loan growth of banks in Ethiopia. Moreover, from the independent variables included as
control variables in the regression analysis, loan growth rate and GDP growth are found to
have statistically significant positive impact on bank profitability in Ethiopia, while loan loss
expense ratio (Loan loss expense to total loan) is found to have statistically significant
negative impact on bank profitability in Ethiopia. Similarly, from control variable included in
the loan growth model, number of bank branches, lending interest rate and deposit to loan
ratio are found to have statistically significant negative impact on the bank loan growth in
Ethiopia. The study recommends that the bank managers and governing body shall focus on
the composite effect of exchange rate variation on the bank profitability and make sure to avail
appropriate strategy to reduce its adverse effect on the profitability of their bank.
Key Words: Bank, Exchange rate, profitability, Ethiopia
Description
Keywords
Bank, Exchange rate, profitability, Ethiopia