Assessment of Foreign Exchange Risk Management in Ethiopian Banking Sector
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Date
2025-09
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Addis Ababa University
Abstract
This study assesses foreign exchange (FX) risk management practices within the Ethiopian banking sector, focusing on selected commercial banks amid a changing regulatory and economic
environment. The analysis is motivated by the persistent depreciation of the Ethiopian Birr and the liberalization reforms introduced by the National Bank of Ethiopia (NBE) in 2024. The research
investigates how banks identify, assess, and mitigate FX risks, particularly transaction, translation, and economic exposures,while considering the effects of policy reforms and the emergence of
independent private forex bureaus. A mixed-methods research approach was used, combining structured Likert-scale questionnaires with open-ended responses from 90 professionals across six
major banks. Quantitative data were analyzed using descriptive statistics via SPSS, while qualitative responses were reviewed thematically. The findings show that although banks have
established internal control frameworks, regular training, and risk identification mechanisms, they face challenges including limited hedging instruments, policy uncertainty, and market
inefficiencies. The introduction of private forex bureaus has added complexity to FX risk, raising concerns around regulatory oversight and market fragmentation. The study concludes that
Ethiopian banks are actively managing FX risks, but significant improvements are needed, particularly the adoption of hedging tools, enhanced NBE oversight, and modernization of treasury
operations. These measures are essential for navigating economic reforms and maintaining financial stability in a liberalizing foreign exchange environment.
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Keywords
Foreign Exchange Risk, Ethiopian Banking Sector, Risk Management, Policy Reform, Currency Fluctuation, Transaction Risk, Translation Risk, Economic Exposure, Private Forex Bureaus, National Bank of Ethiopia.