The Effect of Foreign Exchange Transaction on the Performance of Nigerian Banks

Abstract

This study investigated the effect of foreign exchange transaction on the profitability of Nigerian
banks for the period of 2010 to 2014. The study employed annual data generated from the
annual report of ten (10) publicly quoted banks in Nigeria. To test for the properties of panel
data, Levin, Lin and Chu (2002), Breitung (2000), Im, Pesaran and Shin (2003), Hadri (2000)
and Maddala and Wu (1999) test of panel unit root were deployed. Based on the popularity of
the result we concluded that the variables are integrated of order one I(1). The result of Kao
panel co-integration test indicates that there exists a long run relationship between the variables
under study. The result of the DOLS revealed that foreign exchange income has a negative and
insignificant effect on the profitability of Nigerian banks for the period. Total asset which was
used as a control variable was shown to exert positive impact on the profitability of Nigerian
banks, while total equity has a negative effect on profitability of banks in Nigeria for the same
period under study. The studies recommend that CBN and other monetary authorities should
monitor the activities of the banks to ensure that they don’t charge high premium for selling or
buying foreign exchange to their customers. Banks should enhance their assets base so as to
increase profitability.