Effect of Exchange Rate Volatility on Performance of Commercial Banks in East Africa Community

Abstract

Bank performance indicates the bank’s capacity to generate sustainable profits. The banking sector in Kenya has been experiencing fluctuating performance, which could be detrimental to its survival. The study sought to determine the effect of the risk associated with exchange rate volatility on the profitability of commercial banks in the East African Community. This investigation specifically sought to establish the level of exchange rate volatility hence estimating the risk, and also analyze the effect of exchange rate volatility on commercial banks’ performance. The study was anchored by the profit maximization theory and the monetary theory. It employed an explanatory research design. The study covered the period from 2000 to 2020 and utilized secondary data sourced from Central Banks and World Bank. The study employed a panel estimation procedure since the data was collected in panel series. the study concludes that volatility exists as a risk to the profitability of commercial banks in the East African Community. Using the coefficient of variation, the study found that Uganda performed better than Tanzania. As a result, Tanzania and Kenya saw greater currency rate volatility than Uganda. Further, the results showed that the volatility influenced commercial banks' performance proxied by ROA for the period between 2000 to 2020. The relationship was however found to be weak and negative.