The Effect of Exchange Control on the Performance of Commercial Banks in Ethiopia
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Date
2024-06-26
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A.A.U
Abstract
This study investigated the impact of the foreign exchange control directive, implemented in
Ethiopia since 2016 G.C, on the performance of commercial banks. The directive requires banks
to allocate at least 50 percent of foreign exchange to priority imports, potentially affecting their
financial performance. The study used five years of data from 2019 to 2023 or 80 observations
from 16 commercial banks. This study assessed the distribution of foreign exchange to both
priority and non-priority sectors, as well as its impact on bank performance metrics such as Return
on Assets (ROA) and Return on Equity (ROE). The study used a quantitative research design to
obtain a complete understanding using secondary data and a purposive sampling technique.
Descriptive and Regression analyses were used to evaluate the data. In this study, Random effect
model was selected to be suitable for panel data. The aim is to answer critical questions regarding
the allocation practices of foreign currency by commercial banks in Ethiopia and to evaluate the
consequent effects on their performance. The study's objectives include assessing the allocation of
foreign currency to priority and non-priority sectors, examining its impact on bank performance
and exploring the operational efficiency, assets of the bank and sources of income as control
variables. The study's finding suggested that, operational efficiency and bank assets are important
determinants of bank performance, and also allocation of at least 50 percent of foreign currency to
priority products has both positive and negative effects on bank performance. The findings of this
research provided valuable information for policymakers, banking regulators, and financial
institutions and can also serve as a basis for further studies.