Exchange Rate Fluctuations and Selected Deposit Money Banks Performance in Nigeria

Abstract

This study investigated the impact of exchange rate fluctuations on the financial performance of selected deposit money banks in Nigeria from 2010 to 2023. The research employed descriptive statistics, regression analysis, and diagnostic tests to examine the relationship between exchange rate variability and bank performance. Financial performance was measured using Return on Shareholders’ Funds (RSF), while inflation and exchange rates served as indicators of macroeconomic fluctuations. The analysis revealed that the inflation rate had a negative but statistically insignificant effect on bank performance (IFR = -0.974498, p-value = 0.3629 > 0.05), whereas the exchange rate exhibited a positive yet also statistically insignificant influence on bank performance (EXR = 1.357444, p-value = 0.0806 > 0.05). The coefficient of determination (R²) indicated that approximately 29% of the variation in RSF was explained by inflation and exchange rate movements, while the remaining 71% was attributed to other unobserved factors. Furthermore, the Durbin–Watson statistic of 2.052585 suggested minimal risk of autocorrelation, implying no major omission of significant explanatory variables. Based on these results, it is recommended that the Central Bank of Nigeria (CBN) focus on maintaining inflation at low and stable levels, preferably within single digits to mitigate its adverse effects on bank performance. Although the exchange rate demonstrated a marginally positive impact, excessive volatility could adversely affect credit access in the real sector and hinder overall economic growth. Therefore, sound and consistent monetary policies are essential for ensuring exchange rate stability and supporting sustained economic development.