The Impact of Exchange Rates and Financial Conditions on Returns on Equity in Commercial Banks

Abstract

This study aims to analyze the impact of foreign exchange rates and financial conditions on the financial return rate of commercial banks. The independent variables considered are the foreign exchange rates, denoted as (EX), and financial conditions, denoted as (FIN), while the dependent variable is the return on equity, denoted as (ROE). The study was conducted in Libya during the period from 2010 to 2024. It focuses on measuring the extent to which fluctuations in foreign exchange rates and financial conditions affect banking financial performance indicators, such as the return on equity. Bank of the Republic was selected as a sample due to its prominence among Libyan commercial banks and its large size and activity. The study relied on a descriptive, deductive, and quantitative methodology, employing several statistical tests, including the Lagrange Multiplier (LM) test and the Hausman test, using the EViews statistical analysis software to analyze the data relevant to the study. The results of the analysis of the relationship between foreign exchange rates (EX) and financial returns (ROE) indicated no statistically significant relationship between the two variables, despite the notable fluctuations in foreign exchange rates and the deterioration of the local currency during the period 2021–2024. These changes did not significantly affect the bank’s return on equity.

The results also revealed a statistically significant relationship between financial conditions (FIN) and the return on equity (ROE) of the bank during the study period from 2010 to 2024. This suggests that improving the financial conditions related to the bank can enhance its return on equity. The study recommended that the bank maintain strong levels of capital, liquidity, and cash reserves to withstand economic, political, and financial pressures, thereby promoting the stability of returns and equity. It also recommended diversifying sources of income and relying on stable internal activities, such as sound Islamic financing and core banking services, while reducing dependence on foreign exchange-related operations. Furthermore, the study highlighted the necessity for authorities and policymakers to implement monetary policies aimed at stabilizing foreign exchange rates and mitigating their sharp fluctuations, which may affect the financial returns of commercial banks in the future.