EFFECT OF EXCHANGE RATE ON THE FINANCIAL PERFORMANCE OF PRIVATE COMMERCIAL BANKS IN ETHIOPIA

Abstract

Exchange rates plays an increasingly significant role in any economy as they directly affect domestic price levels, profitability of traded goods and services, allocation of resource and investment decisions. Commercial banks, being the leading financial sectors and the prominent financers of the economy they are disposed to the change in an exchange rate. The purpose of this study was to examine the effect of change in exchange rate on the financial performance (ROE) of private commercial banks in Ethiopia. Financial statements of a sample of eight (8) Private commercial banks were used for a period of fifteen years (2002-2016) with the total of 112 observations. The Data was analyzed on quantitative basis using explanatory and regression analysis. The empirical findings of this study suggest that exchange rate has statistically significant negative impact on the profitability of commercial banks. The result of the model estimated to examine the impact of exchange rate on profitability of private commercial banks in Ethiopia showed that exchange rate has statistically significant positive impact on the financial performance of banks in Ethiopia. It examined variables such as exchange rate, inflation, gross domestic product, net interest margin and bank size in relation to return on asset (ROA).The key findings from the study are; there was a significant positive relationship between variables including exchange rate, inflation, GDP and bank size and the performance of private commercial banks. Whereas, there was insignificant and negative relation between net interest margin and performance of commercial banks. The study recommends government’s fiscal and monetary policy making department needs to consider the rate change effects on companies’ performance and make sure to avail appropriate strategy to reduce its adverse effect on the profitability of their bank.