THE EFFECTS OF FOREIGN EXCHANGE CONTROL ON PERFORMANCE OF COMMERCIAL BANKS IN ETHIOPIA

Abstract

This study was conducted to identify the effect of foreign currency exchange control on performance of commercial banks in Ethiopia. it has mainly focused on newly implemented directive of transparency in allocation of foreign currency and foreign exchange control that has been implemented since 2016. The directive restricts allocation of at least 50% of foreign currency to priority imports, thus, the banks are not allocating foreign currency according to business focuses of the banks. The study has included 16 commercial banks in Ethiopia and 4 years. As a result, the study has used panel data. ROA and ROE were used to measure performance of the banks. Allocation of foreign currency to priority and non-priority imports is measured by using percentage of the foreign currency allocated to the imports in a given year. In addition, the study has used control variables such as size of a bank, management efficiency, and income diversification. Data was analyzed by using descriptive statistics and econometric estimations. To select appropriate panel model between random effect and fixed effect, Hausman test was conducted and random effect model was selected. This study has identified that foreign currency allocation to priority imports has positive effect on performance of the banks. On contrary, allocation of foreign currency to non-priority imports has negative effect. Therefore, this study recommends management of the banks to allocate foreign currency to priority imports.