The impact of foreign exchange fluctuation on the intermediation of banks in Nigeria (1970 – 2004)

Abstract

This study empirically examined the impact of foreign exchange fluctuation on the intermediation of banks in Nigeria with a view to enabling the banking system work efficiently and effectively towards the proper valuation of the Naira. The study used data sourced mainly from Central Bank of Nigeria publications. In conducting this relationship study, sample sizes of 34 years (1970 – 2004) were collected and analyzed. The analysis empirically examined the relationship between exchange rate fluctuation and commercial banks intermediation index with using annual average exchange rate as independent variables while Commercial Banks Intermediation Index (CBII) represented the dependent variable. Using SPSS to conduct the regression and correlation analysis, the study found that there is a positive relationship between foreign exchange fluctuation and CBII, that only about 28% of the changes in CBII is accounted for by variations in foreign exchange(that is, after adjusting for sample size), since the adjusted R2 = 0.278. It also revealed that at 5% significance level, the critical T-value of 2.042 is less than the computed T-value of 3.754, hence, the rejection of Ho. The result led to the conclusion that exchange rate fluctuation has significant impact on banks’ intermediation. It was therefore, recommended that government should ensure a stable naira exchange rate through a right mix of policies and de-emphasis on cash-economy. Key words: Foreign exchange fluctuation, banks’ intermediation.