FOREIGN EXCHANGE RISK MANAGEMENT IN NIGERIAN ECONOMY AND ITS IMPACT ON PROFIT OF BANKS (A CASE STUDY OF UNITED BANK OF AFRICA)
1.1 Background of the Study
Financial Risk management is a relevant development that arises with deregulation of Nigerian economy through the introduction of Structural Adjustment Program (SAP) in 1986. The research was born out of an inquisitive mind and the desire to gain knowledge about the practice of financial risk management in Nigeria especially in the area of foreign exchange. It should be recalled that Nigerian economy moved away from fixed exchange regime in September 1986. The country returned back to fixed exchange regime in 1994 and guided deregulation in 1995.
Cliff (2003) notes that financial risk (which foreign exchange risk is a sub – set) is the chance or probability that some unfavouable event will occur and which will adversely affect the financial foreign exchange risk are financial position or cash flow stream of an organizations other examples of financial risk apart from foreign exchange risk are ownership, liquidity, credit, exchange rate, interest rate etc.
The foreign exchange risk management is relevant because humans are prone to making mistakes for business concern; all facts of its existence are fraught with risk exposure. The business environment in which companies operates is becoming increasingly complex and uncertain due to the globalization of business and rapid introduction of new technologies.
Most business decision are taken with complete knowledge about how the future will evolve with this mind, business managements in twenty first century will emphasize financial risk management. The successful ones will be assessed on the basis of its ability and capability to anticipate, plan and controls risks. The subject will continue to be relevant in discourse because terms trading and investment are modern terms understood by the world.
As long as there is flexible and market determined exchange rate, exchange rate risk will exist and become inevitable.
Egwuonwu (1995) stated that foreign exchange risk management is a new phenomenon in the study of risk exposure. This is because little was known about the subject and its practice and also foreign exchange management itself has been given little cognizant in the past and as a result, it was not considered as a possible tool for long term development in the nations economy.
The breakdown in the fixed foreign exchange rate to a market determines exchange rate was the fundamental factor responsible for the demand for foreign exchange risk management. Also, development in the fields of communication information technology, emergence of global investment called derivative securities (currency futures) options and currency sways) are other factors which contributed to the emergence of the subject.
Nigerian business organization are involves in international trade at both export and import level: demand for exchange of currencies and the presence of exchange fluctuation is ever present under the arrangement hence exchange risk becomes a pre – requisities. The major objective of risk management is to maximize returns and to minimize risk.
It is therefore in this light and in an effort to improve the effectiveness of the foreign exchange risk management in Nigeria that this work was undertaken. It could therefore be said that the inherent problems as experienced by the banking industry today can be linked to the partial or total neglect of the cannons of lending by the officers of the bank, attitude towards risk.
Foreign exchange is regarded as a vital instrument in banking industry especially as it affects the commercial banking system and hence attention should be focused on this area of endeavor.
1.2 Statement of Research Problem
From what has been said earlier, business organization and firms operate in an environment that is characterized by numerous variables.
These variables are dynamic in nature. Two calls for corporate planning and management of foreign exchange risk in an organization in order to cope with the challenges facing foreign exchange risk management.
It is widely acknowledge today that the rate, magnitude and complexity involves in the management of risk has not been able to achieve their desired goal.
Over the years, the transaction involving the use of foreign exchange has increase so also the increase in the risk involve in foreign exchange transaction. The problem is how to effectively manage these foreign exchange risks.