Volatility Contents of Exchange Rate and Profitability of Deposit Money Banks in Nigeria
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Date
2021
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Publisher
Department of Accounting, Adekunle Ajasin University Akungba-Akoko
Abstract
Organizations exist in a dynamic environment and the failure of organizations to
manage their foreign exposures well may have adverse effects on their returns. The study investigated the effect of volatility in foreign exchange rates on Nigerian deposit money banks' profitability. The target population constitutes 22 listed banks and 7 deposit money banks was selected as sample size using purposively sampling techniques. The regressions showed that foreign exchange rate volatility has a positive effect on return on assets, return on equity, and capital adequacy ratio. An increase in exchange rate volatility results in a 6.52, 78.81 , and 38.53 increase in return on assets, return on equity, and capital adequacy ratio, respectively. However, these positive effects are insignificant as the p-value of 0.3403, 0.767, and 0.1877 are greater than the 10, 5, and 1 levels of significance. The regression results also showed that foreign exchange rates affect the net interest margin of Nigerian deposit money banks. An exchange rate increase of one unit leads to a net interest margin decrease of 3.25 percent. The negative effect is nevertheless negligible since the p-value of 0.7008 is higher than 5. It was concluded that the profitability of Nigerian deposit money banks is influenced by the foreign exchange rate, inflation, interest rate, and bank size. According to the findings, robust foreign exchange rate policies could be instituted by bank management as an efficient measure of managing exchange rate risk.
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Keywords
Banks, Capital, Foreign exchange, Profitability, Volatility