Investigating the effect of exchange rate changes on banks performance. A case study of HFC Bank, Ghana

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February 2016
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Ghana since the 1983 has operated under the flexible exchange rate regime (Aryeetey, 2000; Bordo, 1993). Since 2012, the exchange rate in Ghana has been volatile. Business enterprises conduct their business transactions via the services of banks. The study therefore sought to investigate the impact of exchange rate fluctuations on the performance of banks in Ghana. Using quarterly data on exchange rate (ER) as a macroeconomic determinant, and bank specific factors of capital adequacy ratio (CAD), Credit Risk (CdtRSK), Liquidity (Ldty), and Operating Efficiency (OpEff). HFC bank performance was evaluated following the camel-model profit indicators of return on asset (ROA), return on equity (ROE) and net-interest-margin (NIM). In addition, Commissions earned on international Trade (COT) ratio was also used as a profit indicator. Data from period of January 2008 to June 2015 was used in estimation followed a restricted vector auto-regression methodology, so as to capture short run and long-run dynamics, as the series were found to be stationary after first differencing and the Johansen Cointegration test showed that the series were Cointegrated. ER was significant and positively related with ROE, NIM and COT in the long-run, but negative and significant with ROA. The study found ER to have a significant short-run causality with ROE and COT. The study therefore concludes that HFC management was efficient in managing its equity, net interest margin and commission on trade. The study recommends that Bank management should adopt efficient and effective practices so that banks do not make losses from exchange rate fluctuations with regards to its asset management. Also minimization of operation cost by banks should be encouraged.
A thesis presented to the Department of Economics, Kwame Nkrumah University of Science and Technology in partial fulfillment of the requirements for the degree of Master of Science in Economics