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FOREIGN
EXCHANGE AND INTERNATIONAL TRADE ITS EFFECT ON BANK PROFITABILITY
ABSTRACT
This project is
titled foreign exchange and international trade it’s effect on bank
profitability. It examines the extent and effect of foreign presence in
domestic banking markets. It investigate how net interest margins, overhead tax
paid and profitability differ between foreign and domestic banks we find that
foreign banks have higher profit than domestic bank in developing countries but
the opposite is the case for developed countries. Estimation result suggest
that an increased presence of foreign bank is association with a reduction in
profitability and margins for domestic banks are regard to foreign exchange and
international trade.
TABLE OF
CONTENTS
CHAPTER ONE
Introduction
1.1
Background of the
study
1.2
Statement of Problem
1.3
Objectives of the
study
1.4
Research
Questions
1.5
Hypothesis
1.6
Significance of the Study
1.7
Limitation of the
study
1.8
Definition of Terms
CHAPTER TWO
Literature Review
2.1 The effect of Foreign
Exchange and International Trade on Bank
Profitability
2.2 Foreign
Exchange Market
2.3 Foreign
Currency Exposure of a Commercial bank
2.4 Exchange
Rate Volatility
2.5 Foreign Exchange and
International Trade Risk management
2.6 Foreign
exchange and International Trade Risk
2.7 Foreign Exchange and
International Trade Risk and Commercial Bank
2.8 Central Banks Role in Foreign
Exchange Risk
Management
2.9 Foreign Exchange and
International Trade Risk and its Association with other types of
Risks.
CHAPTER THREE
3.1 Research
Design and
Method
3.2 Research
Design
3.3 Research
Population and
Sample
3.4 Sampling
Technique
3.5 Measuring
Instrument
3.6 Method of
Data
Collection
3.7 Method of
Data
Analysis
CHAPTER FOUR
Data Analysis and
Result
4.1 Data
Analysis
CHAPTER FIVE
Summary of Findings
Conclusion and Recommendation
5.1 Summary of
Findings
5.2
Conclusion
5.3
Recommendation
Bibliography
Appendix
Foreign exchange is
define by
1.
Selshy gishen as: the conversion of one country’s currency into that of another
in a very free economy a countr’y currency is valued according to factors of
demand and supply.
2.
By fortex clipart he defined foreign exchange as a system by which one currency
is exchange for another to enable international transaction to take place.
3.
Harper Collin he defined exchange as the system by which one currency is
converted into another to enable international transaction to take place
without physical transportation of good.
4.
By Houghton Mifflin he defined foreign exchange as a transaction of
international monetary business as between government or business of different
countie, negotiable bill drawn is one country to be paid in another country.
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
In recent decades, international trade in goods and financial services has
become increasingly important. To facilitate such trade, many banking
institution have also become international.
Foreign exchange market (currency market) is a form of exchange for the global
decentralized trading of international currencies. Financial centres around the
world function as auchors of trading between a wide range of different types of
buyers and sellers around the clock.
The foreign exchange
market determines the relative valve of different currencies.
The foreign exchange market assist international trade and investment by
enabling currency conversion for example, it permits a business in Nigeria
import goods from European union member states especially Eurozone members and
pay Euros. Ever through its income is in Nigeria. It also support direct
speculation in the valve of currencies and the carry tradE, speculation basat
on the interest rate differential between two currencies.
In a typical foreign exchange transaction a party purchases some quantity of
one currency by paying some quantity of another currency. The modern foreign
exchange market began forming during the 1970s after three decades of
government restrict on foreign exchange transaction (the Bretton wood system of
monetary management established the riles for commercial and financial
relations among the world’s major industries states after world war II) when
countries gradually switched to floating exchange rate from previous exchange
rate regime which remained fixed as per the Bretton wood system.
The foreign exchange market is unique because of the following characteristics.
1.
Its huges trading volume representing the largest asset class in the world
leading to high liquidity.
2.
Its geographical dispersion
3.
The variety of factors that affect exchange rates
4.
Its continuous operation hours a day except weekend i.e trading from
20:15 GMT on Sunday until 22:00 GMT Friday.
5.
The law margins of relative profile compared with markets of fixed income.
6.
The use of leverage to enhance profit and loss margins and with respect to
account size.
As such it has been
referred to as the market closest to the ideal of perfect competition not withstanding
currency intervention by central banks. According to the bank for international
settlement as of April 2010, average daily turnover in global foreign exchange
market is estimated at $3.98 trillion a growth of approximately 20% over the
%3.21 trillion daily volume as of April 2007. Some firms specializing on
foreign exchange market had put the average daily turnover in excess of US $4
trillion.
Banks have expanded internationally by establishing foreign subsidiaries and
branches or by taking over established foreign banks. The internationalization
of the banking section has been spurred by the lateralization of financial
market worldwide. Developed and developing countries alike now increasingly
allow banks to be foreign owned and allow foreign entry on a nation treatment
basis.
Financial liberalization of this kind of proceeds, among other reasons on the
premise that the gains from foreign entry to the democratic banking system out
weight any losses several authors have addressed the potential benefits of
foreign bank entry for the domestic economy in terms of better resource
allocation and higher efficiency Levine (1996) specifically mention that
foreign bank may:
i.
Improve the quality and availability of financial services in the domestic
financial market by increasing bank competition by enabling the greater
application or more modern banking skills and technology.
ii.
Serve to stimulate the development of the underlying bank supervisory and legal
framework.
iii.
Enhance a country’s access to international capital. There may also be cost to
opening financial market to foreign competition stightz (1993) for instance
discusses the potential costs to domestic banks local entrepreneurs and the
government resulting from foreign bank entry.
Domestic
banks may incur costs they have to compete with larger international bank with
better reputation local entrepreneurs may receive less chess to financial
service since foreign generally concentrate on multinational firms and
government may find their control of the economy diminished since foreign banks
tend to be less sensitive to their wishes.
As
yet little evidence exist of the effects of an internationalization of the
banking sector other than several case studies of foreign bank entry MC
Fadden (1994) reviews foreign bank entry in Australia and finds that this has
led to improved domestic bank entry operations. Bhattacharaya (1993) reports on
specific cases in Pakistan, Turkey, and korea where foreign banks facilitated
access to foreign capital for domestic project pigott (19986) describe the
policies that have made increased foreign bank activity possible in nine
pacific Basin countries and provides some aggregate statistics on the size and
scope of foreign banking activities in these markets.
1.2 STATEMENT
OF PROBLEM
The
statement of problem of the research work is to discuss the effect of foreign exchange
and international trade on bank profitability.
1.3 OBJECTIVES
OF THE STUDY
We
the researcher our aims are to provide a systematic study of how banks profit
from foreign exchange and international activities. However, the objective of
the study are as follows:
1.
To know the effect of foreign exchange on bank profitability
2.
To know the effect of international trade on bank profitability
3.
To know the size and scope of foreign banking activities.
4.
To know the quality and availability of financial services in the domestic
financial market by increasing bank competition.
5.
To know the use of leverage to enhance profit and loss margins and with respect
to account size.
1.4 RESEARCH
QUESTIONS
i. Do foreign exchange affect bank
profitability?
ii. Do international exchange
affect profitability?
iii.
Do foreign exchange and international trade affect the size and scope of
foreign banking activities?
iv.
Do foreign exchange and international trade affect the quality and
availability of financial services in the domestic financial market by
increasing bank competition.
1.5
HYPOTHESIS
HI:
foreign exchange affect bank profitability
H0:
foreign exchange do not affect bank profitability
H2:
international trade affect bank profitability
H0:
international trade do not affect bank profitability
H3: foreign exchange
and international trade affect the size and scope of foreign banking
activities.
H0: foreign exchange
and international trade do not affect the size and scope of foreign
banking activities.
H4: foreign exchange
and international trade affect the quantity and availability of financial
services in the domestic financial market by increasing bank competition.
1.6
SIGNIFICANCE OF THE STUDY
This work will be immense bat to the economy of the country at large. It will
serve as a guard to students of banking and finance who wish to carryout the
same research. Finally it will of importance to the banking because it proffers
ways on how bank can increase their profit through foreign exchange and
international trade.
1.8 DEFINITION
OF TERMS
International
Trade: This may be defined as the
exchange
of goods and services between two or more countries.
Foreign Exchange:
Is seen as the transfer of bank
deposits
and credit instruments that serves as a means of international payment.
Bank:
My be defined as a financial institution where
money
and other valuables are kept for safe keeping.
Bank Profitability:
This may be defined as the money
the
bank earn from the fees that it charges for its services and the interest that
its earn on it’s asset.
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