Foreign exchange risk management in nigerian economy and its impact on profit of banks

Abstract

Foreign exchange risk management has emerged as a critical area of focus in today’s globalized financial environment, particularly for economies like Nigeria, where banking operations are highly sensitive to currency fluctuations. The Nigerian economy, being significantly reliant on imports, exports, and international financial transactions, exposes its banking sector to considerable foreign exchange risks. These risks arise from changes in exchange rates between the Nigerian Naira and major foreign currencies such as the US Dollar, Euro, and British Pound, which can directly impact banks’ profitability, asset quality, and capital adequacy. In recent years, the volatility of global financial markets, combined with domestic economic challenges such as inflation, government policy shifts, and fluctuating oil prices, has heightened the exposure of Nigerian banks to currency-related risks.