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EFFECT OF EXCHANGE RATE FLUCTUATION ON FINANCIAL STABILITY IN NIGERIA (A CASE STUDY OF ACCESS BANK PLC)

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 Format: MS WORD ::   Chapters: 1-5 ::   Pages: 75 ::   Attributes: Secondary Data Analysis ::   80 people found this useful

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CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF STUDY

The Nigerian economy is obviously challenged to become one of the largest economies in the world by 2020 and the 12th largest economy by 2050 (CBN, 2009). Obviously one of the best ways to arrive at the goal stated above is to pursue vigorously rapid and sustainable economic growth and development via well managed exchange rate policy.

According to Rodrick (2007) state that poorly managed exchange rates can have negative effect on the economic growth in Nigeria. The exchange rate plays a significant role in international price for determining the competitiveness of a country. In the same vein, Takaendesa (2006) stated clearly that exchange rate plays a crucial role in guiding the broad allocation of production and spending in the domestic economy between foreign and domestic goods.

Exchange rate is among the most important prices in an open economy. It influences the flow of goods, services, and capital in a country, and exerts strong pressure on the balance of payments, inflation and other macroeconomic variables (Kehinde, 2008). The choice and management of an exchange rate regime is a critical aspect of economic management to safeguard competitiveness, macroeconomic stability, and growth. Therefore, the impact of the exchange rate regime on economic performance is probably one of the most controversial issues in macroeconomic policy with empirical studies providing mixed results (Inoue, 2007). One strand of the literature provides evidence that floating regimes are associated with higher growth (see, for instance, Odusola and Akinlo 2001; Eichengreen and Leblang, 2003; Levy-Yeyati and Sturzenegger, 2003; Reinhart and Rogoff 2004; Miles, 2006; and Rano-Aliyu 2009).

Among all macroeconomic variables, effects of changes in nominal and real exchange rates on macroeconomic conditions have become important due to the integration of financial markets and acceleration of capital flows (Krugman, 2003). The end of the Bretton Woods system has been strictly followed by the adoption of floating exchange rate system in major industrial economies and the other emerging countries over time. Since then, the issue of exchange rate fluctuations given its impacts on price and aggregate output has attracted great attention (Gali, 2004). Economists have developed several explanations for the prominent factors of exchange rate fluctuations which have hindered the potential positive outcomes of efficient macroeconomic management strategies as one of the major determinants of aggregate demand and supply (Eichengreen, 2006).

Exchange rate fluctuation could be defined as the rate at which the domestic price of foreign money continues to change. The main aim of any developing economy like Nigeria is to be able to see price stability as primary to long-run growth and development and should therefore be the core of monetary policy (Catao, 2007).

According to (IMF, 2009) stated that prior to the most recent global financial crisis in 2008/2009, there have been kind of major fluctuations in the exchange rates of many countries especially Nigeria, thus leads to widespread instability in the exchange rate among developing countries. In the seventies (70s), there has been a kind of significance attached to exchange rate in many countries, which could be attributed to the following reasons: the floating exchange rate variability and volatility as well as the foreign exchange risk exposure management as a necessity, the globalization process in Nigeria and the resultant increased rate and volume of fund flows in Nigeria and among nations, the trade liberalization undertaken by most of the developing countries since 2000s, which opened up their economies respectively, the internationalization of modern business all over the world and the continuing growth in world trade relative to the national economies and the trends towards economic integration in some regions in the world; and the significant change in the technology of money transfer.

According to (Ardic, 2006) stated that many emerging economies like Nigeria went through economic crises associated with large, continuous current account deficits and a kind of real exchange rate misalignment in the 2000s. Governments were of course faced with the option of currency adjustment; which lead to devaluing their national currencies which thus have effect on the financial liberalization of the country.

On the other hand financial liberalization has become a kind of economic policy package in both advanced and advancing countries. For more than ten years now, the financial liberalization of developing countries like Nigeria has been seen as a necessary and important aspect of an economic policy package which according to Ghose, (2005) called it “Washington Consensus”. In order to revamp the economy in most of the developing countries, their economy implemented a kind of economy recovery programme called “Structural Adjustment Programme” which was formally introduced by the Bretton Woods Institutions (World Bank and International Monetary Fund) with the aim of liberalizing prices in distress and economic melt-down situations. The study wishes to examine the effect of exchange rate fluctuation on financial stability in Nigeria using the access bank Plc as the case study.

1.2 STATEMENT OF THE PROBLEM

Foreign exchange rate fluctuations could be an important source of risk for financial institutions. In the worst case, large foreign exchange losses could lead to instability in the Nigeria economy besides causing huge burdens on financial growth and stability (Jamal and Khalil, 2011). The foreign exchange exposure can be discerned largely from their accounting data, the indirect exposure, which arises from impacts of exchange rate fluctuations on the economy (Kinyuma, 2013).

Exchange rate movement in Nigeria has been variable with periods of rapid depreciation of the domestic currency Nigeria Naira, which adversely affect the Nigerian economy. This has seen the exchange rate against the USD to get to as high as naira; 360 making it difficult for the banks to predict the future rate with precision. This has greatly affected the performance of Nigeria economy as they seek to provide adequate currency to promote international business.

Several studies have been done on the effects of exchange rate fluctuations on financial performance in other nations. For instance, Elhiraika and Ismail (2006) looked at financial sector policy and poverty reduction in Nigeria. They examine the structure and performance of the financial sector in Nigeria and its role in poverty alleviation. Financial sector reforms should be widened and deepened to foster both financial and real growth and a radical paradigm shift is imperative for developing a pro-poor financial structure involving both Islamic and conventional microfinance programs. Adam (2012) examined exchange rate options for Nigeria. It argues that the exchange rate regime currently sits uncomfortably between two regimes. The first is a fixed exchange rate anchored by a set of ‘currency board’ rules. Though broadly effective in a macroeconomic sense, this regime has been plagued by quite serious problems of rent-seeking and corruption more or less since its inception in July 2011. Pitia and Lado (2015) sought to test of relationship between exchange rate and inflation in Nigeria using granger-causality approach using time series monthly data for the period August 2011 to November 2014. The study reveals that there exists a unidirectional causality from exchange rate to CPI without feedback.

Locally, Cherop (2010) did a survey on exchange rate fluctuation on tea export earnings among smallholders’ tea factories in Nigeria where she established that the exchange rate fluctuations greatly affected the earnings of smallholders at tea factories. During the time of depreciating local currency, the export earnings were higher even with low export quantities while export earnings reduced when the currency was appreciating. Maina (2010) did a study on the impact of exchange rate variability on investment in the electric power sub-sector in Nigeria. Mania’s findings show that the investments were high in the power subsector when the exchange rates were stable as compared to times of high fluctuations. Mwaniki (2012) examined the sensitivity of Nigeria banks’ stock returns to interest rate and exchange rate changes. This study measured performance using stock returns in Nigeria. The findings show that 73.2 % changes stock price of Nigeria economy listed in the NSE could be accounted for by changes in foreign exchange. Njenga (2014) examined the impact of real exchange rate volatility on economic growth in Nigeria and established that exchange rate volatility positively impacts on GDP growth but is not significant in affecting GDP growth rate. Ramos (2013) examined the effects of exchange rate fluctuations on changes in retail oil prices in Nigeria. From the analysis of previous studies above, the existing studies have been conducted on exchange rate fluctuations and firm performance from other countries targeting different sectors. However, their findings may not be applicable for the banking sector in Nigeria due to different macro-economic variables. This study therefore seeks to fill this research gap by seeking answers to one research questions: what are the effects of exchange rate fluctuations on financial stability in Nigeria?

1.3 AIM OF THE RESEARCH

The main aim of the research work is to examine the effect of exchange rate fluctuation on financial stability in Nigeria.

The objectives of the research are:

  1. To determine the relationship between exchange rate fluctuation and price stability in access bank Plc.
  2. To determine the effect of exchange fluctuation on broad money supply in access bank Plc.
  3. To determine the factors affecting the efficiency of access bank Plc. in the control of price variability

1.4 RESEARCH QUESTIONS

The study came up research questions so as to ascertain the above stated objectives; the research questions for the study are stated below as follows:

  1. What is the relationship between exchange rate fluctuation and price stability in access bank Plc?
  2. What is the effect of exchange fluctuation on broad money supply in access bank Plc?
  3. What are the factors affecting the efficiency of access bank Plc. in the control of price variability?

1.5 STATEMENT OF RESEARCH HYPOTHESIS

Hypothesis 1

H0: exchange rate fluctuation does not influence financial stability in access bank plc

H1: exchange rate fluctuation influences financial stability in access bank Plc

Hypothesis 2

H0: exchange fluctuation has no significant effect on broad money supply in access bank Plc

H1: exchange fluctuation has significant effect on broad money supply in access bank Plc Hypothesis 3

H0: exchange rate fluctuation has no significant effect on the efficiency of access bank Plc. in the control of price variability

H1: exchange rate fluctuation has significant effect on the efficiency of access bank Plc. in the control of price variability

1.6 SIGNIFICANCE OF STUDY

The study on the effect of exchange rate fluctuation on financial stability will be of immense benefit to access bank plc, the federal government of Nigeria, all the listed companies on the Nigeria stock exchange and other researchers that wishes to carry out similar research on the above stated topic as the findings from the study will reveal the relationship between exchange rate fluctuation and the financial stability which will justify Mahmood, Ehsanullah, and Ahmed (2011) on  the role of exchange rate in affecting the macroeconomic performance of any country is of leading nature. The study will investigate whether uncertainty or fluctuations in exchange rate affect the macroeconomic variables in Nigeria; the study will also discuss the impact of financial stability on exchange rate. The study will also contribute to the body of the existing literature on the effect of exchange rate fluctuation and financial stability in Nigeria.

1.7 SCOPE OF STUDY

The study on the impact of exchange rate fluctuation on financial instability in Nigeria is limited to access bank Plc; the study will cover the relationship between exchange rate fluctuation and the financial stability, the study will also cover the impact of financial stability on exchange rate


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Paper Information

Format:ms word
Chapter:1-5
Pages:75
Attribute:Secondary Data Analysis
Price:₦3,000
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