| Abstract: | Foreign currency exchange control and management directive have made significant contributions to
the overall management of foreign currency in private commercial banks The government takes full
ownership of foreign currency, the FX control, as a development strategy, gives a clear indication
for financial institution on how to handle their foreign currency allocation and management. This
study examined the effects of foreign currency exchange control on performance of banks in
Ethiopia. It has mainly focused on newly implemented directive of transparency in allocation of
foreign currency and foreign exchange control that has been implemented since 2016. The directive
restricts allocation ratio as 10% to medicine, 50% to other priority items and 50% to non-priority
item thus, the banks are not allocating foreign currency according to business focuses of the banks.
The study applied qualitative and descriptive research approaches. It has included 16 private
commercial banks in Ethiopia and 6 years data. As a result, the study has used panel data. Return on
Asset (ROA) and Return on Equity (ROE) were used to measure performance of the banks.
Allocation of foreign currency to priority and non-priority imports is measured by using percentage
of the foreign currency allocated to the imports in a given year. Data was collected from NBE and by
using direct interview with bank officers. The collected data was analyzed by using descriptive
statistics (Regression, Correlation and others) and econometric estimations. To select appropriate
panel model between random effect and fixed effect, Hausman test was conducted and random effect
model was selected. This study has identified that foreign currency allocation to priority imports has
positive effect on performance of the banks. Therefore, this study recommends management of the
banks to allocate foreign currency by strictly addressing the NBE’s control mechanism. |
