EFFECTS OF EXCHANGE RATE RISK ON PERFORMANCE OF LISTED DEPOSIT MONEY BANKS IN NIGERIA

Abstract This work empirically investigated the effect of exchange rate risk on performance of listed deposit money banks in Nigeria. The study is vital as it portrays the extent to which exchange rate risk influences banks’ performance in Nigeria. Three hypotheses were formulated to guide the investigation and the statistical test of parameter estimates was conducted using panel least square model. The research design used is Ex Post Facto design and data for the study were obtained from the published annual financial reports of 12 selected deposit money banks spanning from 2018-2023. In order to determine the relationship between exchange rate risk and banks performance, some key proxy variables were used in the study, namely transaction risk, translation risk and interest rate risk while banks’ performance is represented by return on equity. Using Panel Least Squares Regression Model, the findings generally indicate that transaction risk and translation risk have negative and insignificant influence on banks performance while interest rate risk has positive and significant influence on banks performance. Based on this, the study concludes that the shock from exchange rate risk (transaction and translation) moves at a negative and insignificant direction to the financial performance of deposit money banks while interest rate risk moves at a positive and significant direction to the financial performance of deposit money banks. In lieu of this, the study recommends that deposit money banks should develop a robust foreign exchange transaction risk management framework which will clearly show its currency risk assessment procedures and implementation of foreign exchange risk management strategy. Also, government and the central bank of Nigeria should increase the stabilization measurements for exchange rate to cushion its risk and by so doing; this could improve the performance of the deposit money banks in Nigeria. Keyword: Exchange Rate Risk; Transaction Risk, Translation Risk; Interest Rate Risk