The Impact of Exchange Rate Volatility on Bank Profitability: An Empirical Analysis   of the Egyptian Banking Sector Before and After the Egyptian Currency Devaluation

Elfaham, Karim; Youssef, Amr; Zakey Eldin, Kenzie

doi:10.21608/acj.2024.387244

The Impact of Exchange Rate Volatility on Bank Profitability: An Empirical Analysis of the Egyptian Banking Sector Before and After the Egyptian Currency Devaluation

Document Type : Original Article

Authors

¹ Lecturer of Accounting and Finance, College of Management and Technology, Arab Academy for Science, Technology and Maritime Transport

² Vice Dean for Educational Affairs, Graduate School of Business, Arab Academy for Science, Technology and Maritime Transport

³ Teaching Assistant, College of Management and Technology, Arab Academy for Science, Technology and Maritime Transport

10.21608/acj.2024.387244

Abstract

This study investigated the impact of bank-specific and macroeconomic factors on the profitability of 11 listed banks in Egypt, focusing on the periods before and after the currency devaluation in late 2016. Utilizing a dynamic panel data model and the Generalized Method of Moments (GMM) approach, the research analyzed the persistence of profits and evaluated the determinants of bank profitability from 2012 to 2022. Key findings revealed that the capital adequacy ratio had an insignificant effect on return on assets (ROA) across both periods, aligning with previous literature. However, liquidity risk exhibited a positive significant relationship with ROA post-devaluation, indicating that higher liquidity could enhance profitability under certain economic conditions. Revenue diversification consistently showed a positive impact on ROA, while operational efficiency negatively affected profitability throughout the study period. Additionally, the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model was initially used to measure exchange rate volatility; however, due to a lack of evidence of volatility, the real exchange rate was instead used as an independent variable, which demonstrated a shift from an insignificant to a significantly negative relationship with ROA after devaluation, highlighting increased sensitivity of bank financial performance to exchange rate fluctuations.

Keywords