Foreign exchange risk management performance in Nigeria and its impact on banks (case studyOf GT bank 2010-2015)
1.1 Background of the study
The catalyst that speeds up the growth and development of every nation’s economy is the nation’s bank. Initially the banking industry was focused on receipts of deposits from customers on demand. But today the banking system has grown beyond that range. The system now includes and embodies the performance of other extra functions which involves financial advisory services, foreign exchange transaction of both domestic and international payment systems. Focusing on foreign exchange, this is trading in foreign convertible currencies. It is a valuable thing earned through exports of goods and services and also the flow of foreign investments, external grants and loans. The transaction in foreign exchange drop under the treasury operations of every legal bank. In the treasury operation management, a sub-section of the unit is focused on treasury operations as a whole with a comprehensiverange of services beyond cash management in which foreign exchange is involved.
Foreign exchange risk is the risk related with the unforeseen changes in exchange rates and foreign exchange exposure as the extent to which unforeseen changes in exchange rates affect the value of a company’s assets. It has been proven thatforex related firms are often times victims to foreign exchange risk on the payables and receipts in foreign currencies. Evan et al (1985) also defined foreign exchange risk management as a program of assessment (identification and quantification) and counterstrategies to mitigate exchange rate risk and saves firm`s economic value. Kirt further added that foreign exchange risk is a financial risk to manage value creation and loss prevention in a firm by internal and external financial tools. This risk arises when fluctuation in the related values of currencies affects the competitive position of an organization. Organizations are opened to foreign exchange risk if the outcomes of their projects relies on future exchange rates and also if exchange rate changes cannot be fully foreseen. Generally, firms are opened to, Transaction exposure, Economic exposure and Translation exposure. Transaction risk is meant to occur where the value of the existing responsibilities are worsened by shifts in the foreign exchange rates. Transactional exposure begins to occur from future cash flows such as trade contracts and it also occurs where the value of existing responsibilities are affected by changes in foreign exchange rates. Economic risk is related to unfavorable impact on entity, income for both domestic and foreign operations because of sharp, unexpected change in exchange rate. Operational exposure happens when the market position of a firm changes due to the effect of exchange rate changes on competition, prices and demand.
Exactly the centerand main reason of treasury functions is to make sure that banks offer comprehensive range of quality services to improve the quality of customer relationship at every point in time. Being that treasury functions cover a wider area, the subject to series of flaws, weaknesses that may hamper its ability to achieve the primal goals cannot be disputed. In place of this view,foreign exchange risk management performance in Nigeria and its impact on banks cannot be swept under the carpet or ignored. In addition to this, the ability to take care of operation at an international level is extremely important to any major financial institution. The same is also true about the need for automating the production and delivery of treasury services. For treasury activities to be virtually and effectively carried out, it is a must that the computers, communication and artificial intelligence provide gateways to planning, execution and control. There is therefore need for comprehensive system of limit on all unmatched foreign exchange positions and for different kinds of currency portfolio in other to makethose potential losses from foreseeable exchanges rate are kept to a level that is allowed.
Previous research studies have provided a relationship between foreign exchange risk management, firm performance and banks. The study delves into how management risk involved in foreign exchange can affect banks.
1.2. Statement of the general problem
The current menace of forex crises has been a cause for serious concern. The increase in foreign exchange has led to the devaluation of our local currency, increase in the current economic hardship of Nigeria. Management foreign exchange in Nigeria has not been effective; this has been evident by the excessive fluctuations of other world currencies when compared with the Nair. The excessive fluctuations has led to the reduction of foreign direct investment as investors prefer to invest in neighboring countries which if it would have been in Nigeria would have created jobs for our unemployment youths.
1.3. Aims and objectives of the study
The major aim of this study is to examine the impact of foreign exchange risk management performance in Nigeria from 2010-2015 using the guaranty trust bank as a case study. Other specific objectives of the study include the following;
- To examine the level of foreign exchange risk management in Nigeria.
- To study the benefits of adequate foreign exchange risk management on the economy of Nigeria.
- To examine the relationship between foreign exchange management and economic development of Nigeria.
- To examine the relationship between foreign exchange risk management and bank profitability in Nigeria.
- To recommend ways of ensuring adequate management of foreign exchange risks in the banking sector.
1.4. Research Questions
- What is the impact of foreign exchange risk management performance on the banking sector in Nigeria?
- What is the level of foreign exchange risk management in Nigeria?
- What are the benefits of adequate foreign exchange risk management on the economy of Nigeria?
- What is the relationship between foreign exchange and economic development of Nigeria?
- What is the relationship between foreign exchange risk management and bank profitability in Nigeria?
- What are the ways of ensuring adequate management of foreign exchange risks in the banking sector?
1.5. Research Hypotheses
H0: Foreign exchange management does not have an effect on Nigerian banks.
H1:Foreign exchange management has an effect on Nigerian banks.
H0: There is no significant relationship between foreign exchange and the economy of Nigeria.
H1: There is a significant relationship between foreign exchange and the economy of Nigeria.
H0: There is no significant relationship between foreign exchange management and the profitability of commercial banks.
H1: There is a significant relationship between foreign exchange management and the profitability of commercial banks.
1.6. Significance of the study
This study would be of immense importance to the banking sector and the government of Nigeria at all levels in educating them on the need for adequate management of foreign exchange risks. The study would also benefit students, research and scholars who are interested in further studies on foreign exchange risk management in Nigeria.
1.7. Scope of the study
The study is on the impact of foreign exchange risk management performance on Nigerian banks from 2010 to 2015 using guaranty trust bank plc as the case study.
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