FOREIGN EXCHANGE RATE VOLATILITY AND ITS EFFECT ON BANK PERFORMANCE

Abstract

This study is about foreign exchange rate volatility and its effect on bank performance. The objectives of the study are: to assess the causal relationship between foreign exchange rate volatility and bank performance in Nigeria, to identify the specific channels through which foreign exchange rate volatility affect bank performance, to assess the potential costs and benefits of foreign exchange rate volatility for Nigerian banks and to provide policy recommendations for managing foreign exchange rate volatility and enhancing bank performance in Nigeria. The study adopted the econometric technique of Ordinary Least Squares (OLS). The Augmented Dickey Fuller test was used in the study to check for unit root. The ADF result showed that Interest Rate (INT) gave negative relationship; thus, Interest Rate (INT) does not conform to the a priori expectations, Real exchange rate (RER) has a positive relationship with return on equity. The figure stood at 36.48155 which means that a unit increase in real exchange rate will lead to 36.48 increase in return on equity in Nigeria within the period under study.  Inflation Rate (INF) has a positive relationship with return on equity at 19299.37. This implies that a unit increase in inflation rate will lead to 19299.37 increase in return on equity in Nigeria within the period under study and Interest Rate (INT) has a negative relationship with return on equity at -2414.120.  This further implies that a unit decrease in interest rate will lead to -198.11 decrease in return on equity in Nigeria within the period under study. On the basis of the foregoing, the study recommends Reevaluate Interest Rate Policies: given the negative relationship between interest rates and ROE, policymakers should consider strategies to maintain lower interest rates to stimulate investment and improve profitability for companies among other recommendations.