Towards Understanding Floating exchange rate: Unveiling Challenges and Opportunities for Competitiveness in Ethiopia's Commercial Banking Sector
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Date
2025-09
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Addis Ababa University
Abstract
The study assessed the challenges and opportunities in the transition of Ethiopia’s to a floating exchange regime in terms of the competitive conditions of the commercial bank sector. By adopting a mixed-methods approach, the study gathered primary data from 113 senior banking professionals representing six major commercial banks and the National Bank of Ethiopia through structured questionnaires to analyze the data using descriptive statistics such as graphical representation, mean, standard deviation, and supplemented by qualitative interviews and secondary sources. The study found that the transition has contributed more sophistication in operations, particularly in strategic planning, foreign exchange risk management, liquidity, and profitability. Although the floating system can potentially align more with the international markets and more diversified revenues, current capacity of Ethiopian banks for absorbing associated risks remains low. Customer response to currency movements is also now more sensitive, and thus banks have to be capable of responding in a faster, data-based manner. The study also showed that even though initial guidelines have been issued by regulatory bodies, existing frameworks have proved to be only partially effective in the control of exchange rate volatility. Commercial banks in the country must, therefore, have specialized treasury departments, enhance internal tools of risk measurement, and install sophisticated hedging instruments such as forwards, options, and swaps. Continuing professional education and client awareness regarding currency risks are also imperative. Furthermore, the National Bank of Ethiopia has to accord topmost priority to supporting a local derivatives market, improving data disclosure, and introducing adaptive regulatory policies for smooth transition. Overall, the study emphasized the importance of harmonized co-operation among financial institutions and regulators to address the evolving nature of exchange rate while preserving banking industry competitiveness.
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Floating Exchange Rate System, Commercial Banks, Opportunities, Challenges, and Competitiveness