An Evaluation of Foreign Exchange Risk Management Effects on the Firm Performance of Commercial Banks in the Democratic Republic of Congo
Abstract
This study sought to undertake an evaluation of foreign exchange risk management effects on the firm performance of commercial banks in the Democratic Republic of Congo. The study was guided by three specific objectives namely to examine the effect of translation exposure, transaction exposure and economic exposure on the firm performance of commercial Banks in the Democratic Republic of Congo. The study used firm size, growth options, interst rates and previous performance as control varaiables. Relevant theoretical and empirical literature was reviewed to concretize the study. The study employed a longitudinal research design and used a population of 25 commercial banks registered and operating in the Democratic Republic of Congo as at 31st December 2017. A simple random of 8 banks was selected to represent the cross-section of banks and the period 2006 to 2017 to represent the time series sample. Secondary data was collected on the variables under study and the data was analyzed by using both descriptive and inferential statistics. The correlation analysis results showed that of the three measures of foreign exchange risk management, only transaction exposure was significantly and positively correlated with the firm performance. The measure was positively correlated to firm performance at 1% level. The multiple regression results showed that the composite measure of the three exposures had significant association with the firm performance. However, when the measures were entered separately in the model, translation exposure was 0.810, p-value>0.10 was not significant; transaction exposure was 0.136, p-value>0.10 was not significant and economic exposure was 0.585, p-value>0.10 was also not significant. These results suggested that only, the composite measure, a set of the foreign exchange risk management measures was significant at 5%, while the other exposures separately were not significant to the firm performance. Among all the four control variables, only firm size, average interest rate and prior year return on assets were significant at 1%, 5% and 1% respectively to the firm performance. The study concluded that on average foreign exchange risk management does not contribute significantly to firm performance. From the findings the study concludes that there was a significant relationship between the composite measure and firm performance. The study recommended that, despite foreign exchange risk being a critical issue in every firm‟s operations, managing it does not add any significant value to the firm performance. The study recommends that those tasked with managing the risks should thus first understand the risks they are exposed to by developing a risk profile. This requires an examination of both the immediate risks from competition and product market changes as well as the more indirect effects of macro-economic forces. The study further recommends that this study be carried out further and the whole banking industry to be studied under categories of listed and not listed and a proper study on all the Tiers. Policy makers should undertake to understand why Forex trading among commercial banks is not as robust in Democratic Republic of Congo as compared to other developed countries and what should be done to improve capital investments to maximize returns.
Keywords: Foreign Exchange Risk Management, Firm Performance, Commercial Banks, Democratic Republic of Congo
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