Effect of Exchange Rate Policies on the Performance of Deposit Money Banks

TABLE OF CONTENTS

 

Title page                                                                                                                    i           

Certification                                                                                                               ii

Dedication                                                                                                                  iii

Acknowledgement                                                                                                      iv

Table of Contents                                                                                                       vi

List of Tables                                                                                                              x

Abstract                                                                                                                      xii

CHAPTER ONE: INTRODUCTION

1.1       Background to the Study                                                                                1           

1.2       Statement of the Problem                                                                               3           

1.3       Research Questions                                                                                        6

1.4       Research Objectives                                                                                       6

1.5       Research Hypotheses                                                                                      7

1.6       Justification of the Study                                                                                7           

1.7       Scope of the Study                                                                                          8

1.8       Organization of the Study                                                                             9

CHAPTER TWO: LITERATURE REVIEW

2.0       Introduction                                                                                                    10

2.1       Conceptual Review                                                                                         10

2.1.1    Exchange Rate and its Regime in Nigeria                                                      10

2.1.2    Exchange Rate Management and Volatility                                                   13

2.1.3    Causes of Exchange Rate Volatility                                                              14

2.1.4    Exchange Rates Fluctuations and Financial Performance of Banks              16

2.1.5    Bank Performance Measurement                                                                   18

2.2       Theoretical Review                                                                                        22

2.2.1    The Purchasing Power Parity (PPP) Theory                                                  23

2.2.2    The International Fisher Effect                                                                      24

2.2.3    The Asset Approach                                                                                       25

2.2.4    The Monetary Approach                                                                                26

2.2.5    The Portfolio Balance Model/ Theory                                                           27

2.3       Empirical Review                                                                                           28

2.4       Gap identified in the Literature                                                                      37

CHAPTER THREE: RESEARCH METHODOLOGY

3.0       Introduction                                                                                                    38

3.1       Model Specification                                                                                       38

3.2       Research Design                                                                                             41

3.3       Population of the Study                                                                                  42

3.4       Sample Size and Sampling Technique                                                           42

3.5       Sources of Data Collection                                                                            43

3.6       Method of Data Analysis                                                                               43

3.7       Variable Measurement                                                                                   44

 

CHAPTER FOUR: RESULTS AND DISCUSSIONS

4.0       Introduction                                                                                                    46

4.1       Regression Analysis                                                                                       46

4.2       Restatement and Testing of Hypotheses                                                        57

4.2.1    Exchange rate policies and efficiency of deposit money banks                     57

4.2.2    Exchange rate policies and solvency of deposit money banks                      57

4.2.3    Exchange rate policies and liquidity of deposit money banks                       58

4.2.4    Exchange rate policies and financial market performance                            58

4.3       Discussion of Findings                                                                                   58

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.0       Introduction                                                                                                    61

5.1       Summary                                                                                                        61

5.2       Conclusion                                                                                                      63

5.3       Recommendation                                                                                           64

REFERENCES                                                                                                           66

APPENDIX I                                                                                                              73

APPENDIX II

 

                                                                                   

 

 

LIST OF TABLES

Table 3.1:        Variables Measurement                                                                                 45

Table 4.1:        Hausman Specification Test                                                                           46

Table 4.2:        Regression Result(Fixed Effect)                                                                    47

Table 4.3:        Hausman Specification Test                                                                           49

Table 4.4:        Regression Result (Random Effect)                                                               50

Table 4.5:        Hausman Specification Test                                                                           52

 

Table 4.6:        Regression Result (Random Effect)                                                               53

 

Table 4.7:        Hausman Specification Test                                                                           54

 

Table 4.8:        Regression Result (Fixed Effect)                                                                   55

 

 

ABSTRACT

Nigerian exchange rates have been fluctuating in relation to major international currencies due to several factors among which are changes in the policies of the government. These policies are usually targeted at protecting the foreign exchange values, preserving the external reserves, maintaining favourable balance of payment and financial equilibrium. This is perceived to have manipulative effect on operations of banks as well as their performance. In view of this, this study seeks to examine the effect of exchange rate policies on the performance of deposit money banks. The specific objectives were to: (i)examine the effect of exchange rate policies on deposit money banks’ efficiency, (ii) evaluate how exchange rate policies affect solvency of deposit money banks in Nigeria, (iii) investigate how exchange rate policies affect liquidity of deposit money banks in Nigeria, (iv) examine how exchange rate policies affect financial market performance of deposit money banks in Nigeria.Ex-post facto research design was used and the time series data of 8 deposit money banks were collected over the period under review (2005 – 2017). The technique used was multiple linear regression analysis. Hausman test was used in ascertaining the stationary state and relationship between the time series variables. The study revealed that (i)increase inflation rate and exchange rate lead to decrease in banks’ efficiency while increase in monetary policy rate leads to an improvement in banks’ efficiency, (ii) increase in inflation rate and monetary policy rate lead to increase in solvency of deposit money banks while increase in exchange rate reduces the solvency of deposit money banks in Nigeria (iii) increase inflation rate, monetary policy rate and exchange rate lead to decrease in banks’ liquidity, (iv) increase inflation rate, monetary policy rate and exchange rate lead to decrease in financial market performance The study therefore recommended thatbank managers should regularly analyses how exchange rate affects their revenue from different stream, and avail appropriate strategy, Regulatory body shall also focus on the composite effect of exchange rate variation and ensure the availability of policy that enforces banks to analyses how their revenue from different sources is affected by exchange rate, the board of director should focus more on effective management of the bank foreign exchange risk as it serves as the major source of income the bank and determine the success of the bank in the long run.