Foreign Exchange Risk Management in Nigeria’s Economy and Its Impact on the Profit of Bank
Chapter One
OBJECTIVE OF THE STUDY
The study will attempt to ask questions and provide answers to the following.
- To know if there is any significant relationship between foreign exchange risk and profitability.
- To determine the effectiveness of the techniques and tools being used.
- To assess the understanding and the depth of knowledge of the practitioners
- To determine to what extent applicability of the practice of foreign exchange risk management is practiced in the Nigerian economy
- To determine the constraints why the concerned parties are not applying the techniques
- Recommend possible modern techniques and how they can be employed in Nigerians economy.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
FOREIGN EXCHANGE RISK MANAGEMENT
Butler (2008) refers foreign exchange risk as the risk related with the unexpected changes in exchange rates and foreign exchange exposure as the extent to which unexpected changes in exchange rates affect the value of a firm’s assets or liabilities. Taggert and McDermott (2000) assert that forex related firms are subject to foreign exchange risk on the payables and receipts in foreign currencies. Evan et al (1985) defines 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 adds foreign exchange risk is a financial risk to manage value creation and loss prevention in a firm by internal and external financial tools. Piet and Raman (2012) say spot rate changes are offset by changes inflation though small firms may depend on unstable currency rates for profits. According to Featherson, Littlefield and Mwangi (2006), foreign exchange risk arises when fluctuation in the relative values of currencies affects the competitive position or viability of an organization. Firms are exposed to foreign exchange risk if the results of their projects depend on future exchange rates and if exchange rate changes cannot be fully anticipated. Generally, companies are exposed to, Transaction exposure, Economic exposure and Translation exposure (El-Masry, 2006; Salifu et al, 2007). 3 Transaction risk occurs where the value of the existing obligations are worsened by movements in the foreign exchange rates. Transactional exposure arises from future cash flows such as trade contracts and also occurs where the value of existing obligations are affected by changes in foreign exchange rates. Economic risk relates to adverse impact on entity /income for both domestic and foreign operations because of sharp, unexpected change in exchange rate. Operational exposure occurs where the market position of a firm changes as a result of the effect of exchange rate changes on competition, prices and demand (El-Masry, 2006). Translation risk is also related to assets or income derived from offshore enterprise. Translation exposure occurs through currency mismatch and it is related to assets or income derived from offshore enterprise (Madura, 2003). Foreign Exchange risk comes about as a disparity between the assets held by a bank and the loans that fund its balance sheet. An unexpected depreciation of the local currency against the USD can dramatically increase the cost of servicing debt relative to revenues. It can also negatively affect the creditworthiness of the bank (hence the ability to raise new funds) and even generate a negative net income, with serious consequences for the long-term financial stability of the bank (Moles, 2002). Banks are particularly vulnerable to foreign exchange rate risk, since they operate in developing countries where the risk of currency depreciation is high.
FINANCIAL PERFORMANCE
The firm’s debt ratio is the proportion of the firm’s debt in relation to the total equity finance in the company’s capital structure (McMenamin, 2009). This key ratio is famously known as an indicator of the company’s long term solvency position and also indicator of the financial risk position of the company. It’s obtained by dividing the total company debt with the total shareholders‟ funds. Gross profit is the difference between revenue and cost of goods sold. Gross Margin is the ratio of gross profit to revenue. Depends on situation or decision analyzed both or one of these two performance indicators can be more suitable. For merchandising decisions in company with large assortment of products gross profit expressed in money terms needs to be used when measuring financial result on the level of all product assortments or on the level of big product group. This allows seeing what the overall financial result without digging into details is. Gross profits are the cleanest accounting measure of true economic profitability. The farther down the income statement one goes, the more polluted profitability measures become, and the less related they are to true economic profitability. For example, a firm that has both lower production costs and higher sales than its competitors is unambiguously more profitable. Even so, it can easily have lower earnings than its competitors (Abor, 2005). The Return on Assets ratio (ROA), also called return on investment, is an important profitability ratio because it measures the efficiency with which the company is managing its investment in assets and using them to generate profit. It measures the amount of profit earned relative to the firm’s level of investment in total assets. The return on assets ratio is related to the asset management category of financial ratios. The calculation for the return on assets ratio is: Net Income/Total Assets (Brealey et al, 2008). In MIX definition the return on asset ratio is: (Net Operating Income Taxes) / Average Assets. The higher the percentage, the better, as a high percentage means that the company is succeeding in using its assets to generate sales.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought foreign exchange risk management in Nigeria economy and its impact on profit of bank
Sources of data collection
Data were collected from two main sources namely:
(i)Primary source and
(ii)Secondary source
Primary source:
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.
Secondary source:
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
Population of the study
Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information foreign exchange risk management in Nigeria economy and its impact on profit of bank. 200 staff of UBA in Benin City, Edo state was selected randomly by the researcher as the population of the study.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain foreign exchange risk management in Nigeria economy and its impact on profit of bank. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenge of foreign exchange risk management in Nigeria economy and its impact on profit of bank
Summary
This study was on foreign exchange risk management in Nigeria economy and its impact on profit of bank. Six objectives were raised which included: To know if there is any significant relationship between foreign exchange risk and profitability, to determine the effectiveness of the techniques and tools being used, to assess the understanding and the depth of knowledge of the practitioners, to determine to what extent applicability of the practice of foreign exchange risk management is practiced in the Nigerian economy, to determine the constraints why the concerned parties are not applying the techniques, recommend possible modern techniques and how they can be employed in Nigerians economy. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of UBA Benin city, Edo state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made human resource managers, accountants, customer care officers and marketers were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies
Conclusion
This study covers risk management in UBA. An event study methodology was employed to examine the effects of deposit, asset quality and credit risk exposures on the growth and profitability of Nigeria commercial banks. Based on the analysis of regression and correlation of the banks. The study concluded that deposit, asset quality and credit risk exposures have significant positive impact on the growth and profitability of Nigeria commercial banks.
Recommendation
Based on our research findings on the impact of risk management in Nigeria banking industries, were hereby make the following suggestions to banks:
- Commercial banks risk management departments should be more prudent in identifying and evaluating risks so as to enhance growth and profitability of financial institutions.
- Banks should be careful in their lending habit by making proper channeling of their funds to the supposed sectors of the economy.
- Adequate measures should be taken by the bank managers to avoid bank fragility or distress.
- Effective control measures should be taken also by the risk management department of the banking sector to avoid bankruptcy.
- Banks are to analyze the credit portfolio of a customer before giving loan a customer.
- The policy makers must determine the organizational structure of the lending functions and establish guide lines on how to review loan applications and outstanding loans.
REFERENCES
- Akinsulire, O. (2002), Financial Management, Second Edition, Lagos, El-Toda Ventures Limited.
- Anyafo, A. M. O. (2001) Investment Risk Evaluation: The State of the Art in Investment and Project Analysis, Enugu: Banking and Financial Publication.
- Asika, N. (2006), “Research Methodology in the Behavioural Science”, Lagos: Longman Publishers
- Brown, K. C. and D. I. Smith, (1988) “Recent Innovation in Interest Rate Risk Management and The Reintermediation of Commercial Banking” Financial Management Writer.
- Chartered Institute of Bankers, (2000), Credit Risk Management: Framework for Credit Risk Management, WBC Book Manufacturing Bridgends.
- Ebhalaghe, J. U. (1995), Corporate Financial Risk exposure Management, Lagos, Ronald Printing Company Limited
