For Partial Fulfillment of the Requirements for The Award of Master of Science in Corporate Finance with a Specialty in Investment Management
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Date
2025-09
Authors
Fita Agidew
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Publisher
Addis Ababa University
Abstract
The banking industry plays a vital role in Ethiopia's financial system by enabling the movement of essential funds for producing goods and services, which in turn improves living standards and contributes to the nation's overall welfare. However, fluctuations in exchange rates present significant challenges for banks operating in this dynamic environment. This research examined the relationship between exchange rate fluctuations and the financial performance of private commercial banks in Ethiopia, using panel data from 2011 to 2024 that includes eleven banking institutions. The findings reveal a strong negative impact of exchange rate fluctuations on bank profitability, highlighted by a significant inverse relationship between rising exchange rates and return on assets (ROA). Additionally, larger banks struggle to maintain higher profitability, likely due to operational inefficiencies, risk management challenges, or limited economies of scale, as indicated by the negative correlation between bank size and ROA. The study also shows that a higher money supply ratio negatively affects ROA, implying that excess liquidity can harm profitability. Similarly, the negative relationship between the loan-to-deposit ratio and ROA suggests that aggressive lending practices may lead to increased credit risk and a rise in non-performing loans. Based on these findings, the study recommends that banking professionals and policymakers focus on strategic decision-making, strong risk management practices, and effective regulatory policies to help private commercial banks remain competitive amid exchange rate fluctuations. For future research, it suggests exploring sector-specific dynamics, customer behavior, the impact of technological advancements, and conducting cross-country comparisons to gain deeper insights into the challenges and opportunities facing banks in Ethiopia's evolving financial landscape
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Keywords
Exchange rate, Financial Performance, Panel