Currency risk impact on the financial performance of multilateral banks

Abstract

Purpose

The purpose of this paper is to investigate the impact of currency risks on the financial performance of multilateral banks (MBs). Financial performance is measured here by after-tax accounting profitability or losses.

Design/methodology/approach

Quantitative hypothesis regarding the impact of currency risks on the financial performance of MBs was tested by a two-tailed t test for significance of the b regression coefficient.

Findings

A regression analysis was done on the total currency risk and financial performance of MBs after taking into account currency risk over eight years. The analysis of variance of the regression of the b coefficient led to non-rejection of the null hypothesis of no association, F(1, 6) = 0.77, p > 0.05. The results of the two-tailed t test on the b regression coefficient suggest that the relationship between currency risk and financial performance is statistically insignificant. Therefore, it was concluded that there is no significant impact of currency risk on the financial performance of MBs.

Research limitations/implications

The results of the study can be generalized only for MBs given their peculiar characteristics as wholesale banks, which are owned mainly by governments and are generally not listed on stock exchanges.

Originality/value

The study is of value to those interested in the multilateral banking industry. To the authors’ knowledge it is the first study providing empirical evidence on currency risk impact on MBs financial performance. The study finds that the currency risk impact on the financial performance of MBs is insignificant. The results are also useful to managers of MBs in terms of benchmarking their effectiveness in managing currency risk compared to their peers and learn from better performers. It has also policy implications in terms of justifying the current self-regulatory status, shareholder monitoring and governance of MBs as they are not significantly impacted by currency risk as it appears to be effectively managed.

Citation

Kamau, P., Inanga, E.L. and Rwegasira, K. (2015), "Currency risk impact on the financial performance of multilateral banks", Journal of Financial Reporting and Accounting, Vol. 13 No. 1, pp. 91-118. https://doi.org/10.1108/JFRA-11-2013-0076