FOREIGN EXCHANGE RISK AND BANK PERFORMANCE: EVIDENCE FROM MENA BANKS

Abstract

We provide evidence on the inverse association between foreign exchange risk and the financial performance of banks in the Middle East and North Africa (MENA) region. The analysis is based on data collected from 135 banks from 14 countries over the period from 2015 to 2019. The results reveal a negative correlation between foreign exchange (FOREX or FX) risk and both bank performance measures considered. This suggests that banks with higher exposure to risk tend to exhibit lower performance in the MENA region. The study recommends that banks should regularly assess and project their foreign exchange exposure to minimise the associated foreign exchange risks. Furthermore, the findings underscore the importance of establishing appropriate frameworks and policies for prompt reporting and recording of foreign exchange losses. We highlight the importance of bank management to focus on developing effective financial instruments and techniques to hedge against foreign exchange risk, particularly in relation to profit and loss of banks in the MENA region. Ultimately, these measures will contribute to enhancing the financial performance of banks operating in the MENA region. In addition, results suggest that monetary policy should be primarily considered in supervising banks that are reliant on foreign funding for risk hedging.