THE INFLUENCE OF FOREIGN EXCHANGE AND INTERNATIONAL TRADE ON BANK PROFITABILITY
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THE INFLUENCE OF FOREIGN EXCHANGE AND INTERNATIONAL TRADE ON BANK PROFITABILITY
ABSTRACT
The title of this project is foreign exchange and international trade and its impact on bank profitability. It investigates the scope and impact of foreign participation in domestic banking markets. It investigates how foreign and domestic banks differ in terms of net interest margins, overhead tax paid, and profitability.
In developing countries, foreign banks make more money than domestic banks, but the opposite is true in developed countries. According to the estimates, a higher presence of foreign banks is associated with a decrease in profitability and margins for local banks in terms of foreign exchange and international trade.
INTRODUCTION TO CHAPTER ONE
1.1 BACKGROUND OF THE STUDY
International trade in goods and financial services has grown in importance in recent decades. Many banking institutions have also gone global to accommodate such commerce.
The foreign exchange market (currency market) is a type of exchange that facilitates the global, decentralised trading of international currencies. Around the world, financial centres serve as intermediaries for trading between a diverse spectrum of buyers and sellers.
The relative value of different currencies is determined by the foreign exchange market.
The foreign exchange market facilitates international trade and investment by allowing currency conversion. For example, it allows a Nigerian company to import goods from European Union member states,
particularly Eurozone members, and pay in Euros. Nigeria is ever through its income. It also supports direct currency speculation and the carry trade, which is based on the interest rate differential between two currencies.
In a normal foreign exchange transaction, one party buys some amount of one currency and pays some amount of another currency. After three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the riles for commercial and financial relations among the world’s major industrial states after World War II),
the modern foreign exchange market began to form during the 1970s, when countries gradually switched to a floating exchange rate regime from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.
The following criteria distinguish the foreign exchange market.
1. Its massive trading volume is the world’s largest asset class, resulting in high liquidity.
2. Its geographical spread
3. The various factors that influence exchange rates
4. It is open 24 hours a day, except on weekends, and trades from 20:15 GMT on Sunday to 22:00 GMT on Friday.
5. The law margins of relative profile in comparison to fixed income markets.
6. The use of leverage to increase profit and loss margins and account size.
As a result, despite central bank currency intervention, it has been described to as the market closest to the ideal of perfect competition. According to the Bank for International Settlements, the average daily turnover in the global foreign currency market is anticipated to be $3.98 trillion in April 2010,
a 20% increase over the $3.21 trillion daily volume in April 2007. According to some organisations specialising in the foreign currency market, the average daily turnover exceeds US $4 trillion.
Banks have expanded worldwide through the establishment of overseas subsidiaries and branches, as well as the acquisition of existing foreign banks.
The lateralization of the global financial market has accelerated the internationalisation of the banking sector. Developed and emerging countries alike are progressively allowing foreign ownership of banks and foreign entry on a nation-to-nation basis.
Several authors have addressed the potential benefits of foreign bank entry for the domestic economy in terms of better resource allocation and higher efficiency,
based on the premise that the gains from foreign entry into the democratic banking system outweigh any losses. Levine (1996) expressly states that a foreign bank may:
i. Improve the quality and availability of financial services in the domestic financial market by enhancing bank competition and allowing for greater use of more modern banking skills and technology.
ii. Encourage the development of the underlying bank supervisory and legal structure.
iii. Improve a country’s access to international capital. There may also be costs associated with opening the financial industry to international competition.
For example, stightz (1993) addresses the potential costs of foreign bank entry to domestic banks, local entrepreneurs, and the government.
Domestic banks may incur costs because they must compete with larger international banks with better reputations; local entrepreneurs may receive less chess to financial services because foreign generally concentrate on multinational firms; and the government’s control over the economy may be eroded because foreign banks are less sensitive to their wishes.
Other than a few case studies of foreign bank entry, there is scant evidence of the effects of banking sector internationalisation. MC Fadden (1994) examines international bank entry in Australia and discovers that it has resulted in better domestic bank entry operations.
Bhattacharaya (1993) documents particular situations in Pakistan, Turkey, and Korea in which foreign banks eased access to foreign finance for local projects.
Pigott (19986) describes the regulations that have allowed for greater foreign bank involvement in nine Pacific Basin countries, as well as some aggregate information on the size and extent of foreign banking activity in these markets.
1.2 STATEMENT OF THE PROBLEM
The research problem is to discuss the impact of foreign exchange and international commerce on bank profitability.
1.3 OBJECTIVES OF THE STUDY
Our goals as researchers are to give a systematic examination of how banks profit from foreign exchange and international activities. However, the study’s goals are as follows:
1. To understand the impact of foreign exchange on bank profitability.
2. To understand the impact of foreign commerce on bank profitability.
3. To understand the breadth and size of overseas banking activities.
4. To learn about the quality and availability of financial services in the domestic financial sector as bank competition increases.
5. Understand the utilisation of leverage to improve profit and loss margins and account size.
1.4 RESEARCH QUESTIONS
i. Does foreign exchange have an impact on bank profitability?
ii. Does international exchange have an impact on profitability?
iii. Do foreign exchange and international trade have an impact on the scale and breadth of overseas banking operations?
iv. Do foreign exchange and international commerce increase bank rivalry, hence lowering the quality and availability of financial services in the local financial market?
1.5 HYPOTHESIS
Foreign exchange rates have an impact on bank profitability.
H0: Foreign exchange has no impact on bank profitability.
H2: International commerce has an impact on bank profitability.
H0: International commerce has no impact on bank profitability.
H3: the extent and scope of foreign banking activities are influenced by foreign exchange and international trade.
H0: the size and scope of foreign banking activities are unaffected by foreign exchange and international trade.
H4: Foreign exchange and international trade increase bank competition, which reduces the quantity and availability of financial services in the local financial market.
1.6 SIGNIFICANCE OF THE STUDY
This endeavour will have a huge impact on the economy of the country as a whole. It will protect students of banking and finance who seek to conduct the same research. Finally, it will be useful to the banking industry since it suggests ways for banks to boost their profits through foreign exchange and international trade.
1.8 DEFINITION OF TERMS
International trade can be defined as the
Two or more countries exchange products and services.
Foreign exchange is defined as the movement of funds from one bank to another.
Deposits and credit instruments that can be used to make overseas payments.
A bank is a type of financial institution.
Money and other valuables are kept in a safe place.
Bank profitability can be described as the amount of money made by the bank.
The bank makes money by charging fees for its services and earning interest on its assets.
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