The Management Of Foreign Exchange Risk And Corporate Performance In Nigeria Economy (A Case Study Of United Bank Of African Plc, Ilorin)

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The Management Of Foreign Exchange Risk And Corporate Performance In Nigeria Economy (A Case Study Of United Bank Of African Plc, Ilorin)


Chapter One


Introduction

1.1 Background of the Study

International trade and capital flows require foreign exchange market because common despite increase in economy interdependence in the world, each country maintain its own national medium of exchange. The official foreign exchange market in Nigeria s made up of the federal ministry of finance and the central bank of Nigeria as the apex institution, authorized dealers including commercial and merchant bank, development bank and bureau de exchange.

The federal ministry of finance and the central bank are jointly responsible for the formulation of exchange control policies and procedure, while the banking system and d bureau d exchange services as a channel for implementing official policy operation side by side with the official foreign exchanges, marketing is the parallel or black market (agene 1991).

Since 1985 the central bank of Nigeria (CBN) as attempted to evolve an optional exchange rate for local currency at the same sought to achieve a system that preferentially allocates the available of foreign exchange to the productive sector that agriculture and manufacturing. It as been reluctant to allow the inter play of forces of demand and supply to determine exchange rate and allocation of scare foreign exchange to the productive sector that is agriculture and manufacturing. it has been reluctant to allow the into play force of demand and supply to determine exchange rate and allocation of scarce foreign exchange, this subsidy combined with the private biding system has create service pressure on the domestic money market, as over #35 billion in subsidized foreign exchange in 1955.

However, against the background that foreign exchange market(fem) s faced with problem, the federal government of Nigeria (FGN) took two economic emergency in October 1985 and adopted structural adjustment programmed(sap) in July 1986. The programmed give birth to second tier foreign exchange market (SFEM) this legislation exchange regime in Nigeria since independence in terms of the dismantling of the restriction and bureaucracies which plagued previous regime (agene 1991).

Structural adjustment programmed (sap) refers to a set of comprehensive economic reform measure designed to correct imbalance in the economy arising from unfavorable external factors s well as in appropriate domestic policies.

The objective of (sap) was to effectively restructure the consumption and production pattern of the Nigeria economy to eliminate price distortion heavy foreign exchange earns and imports of consumption and producer goods.

The major thrust of structural adjustment programmed (SAP) include following

  1. Achieve fiscal land balance on payment viable over the period
  2. Restricting and diversity the productive base of the economy in others to reduce dependency on a single major foreign exchange earns and imports.
  3. Lay the basic for a sustainable non inflationary economic growth.
  4. Lesson the dominance or an production investment in the public sector efficiency and encourage the growth potential of the private sector.

The overvalued naira led to a fight of capital, it thus aided that naira was converted to harder currencies at the rate that decided to give more value to the naira than it was work now in the regime of foreign exchange market (fem) and banking business carried on in Nigeria in 1949 by the British and the France bank for wise man and woman strong representative in the co operate and wholesales market.

UBA also has a large and established retail franchise and two foreign branches in New York and Grand Cayman Island.

UBA group is known for its initiative and creativity some of the key milestone in its history includes:

  1. First among international to be registered under Nigeria Laws.
  2. First Nigeria bank to offer its share to the public following its listing on the Nigeria stock exchange in 1970.
  3. First Nigeria bank to introduce a cheque guarantee scheme knows as UBA card in 1986.
  4. Won the euro money 2000 award for excellence, as the best domestic bank in Nigeria.
  5. First Nigeria bank/company to gain recognition of the international financial community through the establishment of global depository receipt (gob) programmed.
  6. Consistent and solid financial performance over the past year.

1.2 Statement of the Problem

The Britton woods conference (1944) established a fixed exchange rate system whereby each currency had a fixed parity (value) in relation to the dollar.

In Nigeria, the manufacturing or better still corporate sector depends heavily on imported raw materials machineries, spare part and services. However foreign exchange did not pose any problem on them simply because of the exchange rate.

However with dereligation of the foreign exchange market, this has resulted in high foreign exchange rate. Research in the past have neglected some specific issue that are capable of setting the whole economic system, one such issue and to its research will address in the impact of foreign exchange policy on the Nigeria co operate depend on foreign input for their production.


1.3 Objective of the Study

This research work focused on the risk associated with fluctuation in foreign exchange rate and its effect the performance on co operate organization in Nigeria. The specific objectives of the study are as follow

  1. To exchange the risk fluctuation in exchange rate ac control association with currency management in the multi currency settings.
  2. To investigate on the policies one government cc operations have and how effective this policies have been.
  3. To appraise the impact of the policy tools on the growth and development of the nation economy
  4. To prefer recommendation based on research finding

1.4 Research Questions

  1. Does the various exchange policies help their organization in its corporate performance?
  2. Does fluctuation in the foreign exchange rate affect your net income?
  3. Does profitability of the organization depend of the defendant between the naira and other major currency?
  4. Do you feel the impact of competition in the faces of the development?
  5. Does your unit lost fluctuate?

1.5 Statement of Hypothesis

Base on the research question and objective of study. The following hypothesis stated will be tested.

Hypothesis I

HO: Change in exchange rate and control have dramatic impact on profitability

Hypothesis 2

HI: Fluctuation exchange rate control is not determine by the manager

Hypothesis 3

H0: Fluctuating exchange rate control does not associate with management of currency in multi currency setting.


1.6 Scope and Limitation of the Study

It is essentially importance to state that the study focus on the general appraisal of the foreign exchange policy in Nigeria has this involve an assessment of how objective realized and attendance respect of the policy.

The research will be in historical and case study research which e limited by insufficient finance, lack of enough time, lack of co operation from the respondent and the case study. This may hinder through research.

However, effort will be made to ensure that the above constraints and limitation do not affect the effective completion of the research work. The time frame and resources of the study. How study will only cover a selected number of co operation organizations with high off store activities ranging between the years 1986-2005.


1.7 Organisation of the Study

The organization of the right from chapter one comprises the introduction which is sub divided into six sub section as follows:

Background of the study, statement of the study, statement of research question. While chapter two dealt with the literature review, the third chapter dealt with research methodology and the fourth chapter dealt with data analysis and presentation while the last chapter comprises summary, conclusion and recommendation.


1.8 Definition of Terms

Exchange Control:

A mechanism by which a country scale site harness its foreign exchange resources and rationalization for the settlement of international indebtedness while ensuring their sale favorable development of the domestic economy activities without diminishing the value of its currency (NWARACTIC 1982)

Exchange Rate:

The limit price of a currency in terms of currency of another country.


Chapter Five


5.0 Summary of Finding, Conclusion and Recommendation

5.1 Summary of Finding

Attempt has in this study to analyzed a various policies instrument adopted by the government through a bank of Nigeria (CBN) to manage foreign exchange resource both before and after the advance o (SAP) structural adjustment programmed in Nigeria.

This research in this previous chapter has essentially discussed the foreign exchange market in Nigeria as a core component of the structural adjustment program (SAP)in the country we examined establishment control and operation of the foreign exchange market, it also addressed the major problem or risk arising as a result of fluctuation in the foreign exchange policy exchange rate policy is an important instrument in foreign exchange management. During this era, the exchange of the naira was administered and because it tended to be overvalue.

The following were deduced from the research projects

  1. It was revealed from the study that the Nigeria foreign exchange reserved is made up of gold billion or coins sterling dollars deuce marks and other fully convertible currencies gold tranche in the international monetary fund (IMF), special drawing right (SDR) and oversea bank balances.
  2. The research also pointed and revealed that foreign exchange market in Nigeria up to its present storage was influenced by a number of factors which include the economic force factor gold and other form of currency standards.
  3. The study also finds out that the monetary authority realized that naira was over valued and that they made adjustment to prevent or minimize real exchange state appreciation.
  4. It was also revealed from the study that exchange risk can be eliminated by the use of forward exchange.
  5. It was revealed that foreign exchange policy as part of a national policy has some implication for cost of population, price level resource allocation, capacity, utilization, network and income distribution.
  6. It was also point out aid revealed on how foreign exchange market can be control (act 1962 of foreign exchange).

5.2 Conclusion

This study based able to analyze the various policy instrument adopted to manage foreign exchange risk in the country. it has focused on the cost of implication for an import risk of change in exchange control and expropriate are inherent in a system of multiple sovereign.

At the junction, the survival of organization was also discovered to depend on how the organization will manage foreign exchange. It was been rightly proved, corporate performance of organization in Nigeria is greatly affected by the activities in the foreign exchange market. It therefore implies that foreign organization to perform well, it must adopt the management of foreign exchange risk strategy that suit their organization most.


5.3 Research Recommendation

In view of the above conclusion, the recommendation will be very useful

  1. To achieve efficient: management of foreign exchange risk and corporate perform in Nigeria there should be transparency in the system for allocation of foreign exchange that is the right to receive foreign exchange currency in respect of standing credit or balance of payment of bank by an individual in respect of inter government arrangement.
  2. Exchange rate policies should raised and these are various pricing method that have been used since the incorporation of second tier foreign exchange (SFEM) in September 1986 method such as moping up excess liquidity in the system and finding of foreign exchange market.
  3. There should be credibility and sustainability of the foreign exchange regime.

There should be an aggressive export promotion, more contribution from the non-oil expert sector to our foreign exchange earning so as to boost the supply side. The manager of the firm must therefore determine to hold long in the era of the “crawling peg” tired to a trade weight basket of currencies as a way of achieving an equilibrium real effective exchange in the normal resulting in the programmed of the naira. Before the establishment of the enactment of the exchange control act of 1962, foreign exchange was earned by the private sector and held in balance abroad commercial bank which acted as agent for local exports. During this period, agriculture export contributed to the buck of foreign exchange receipt. The fact that the Nigeria pound was tied to British pound sterling at par, with easy convertibility delayed development of an active foreign exchange market development organization, which is very great in the sense that the domestic currency cost of their imported raw materials an machinery are bound to rise. From our research, it was discovered that a deals of risk arises from fluctuation of the foreign exchange rate. This risk also affects despite these constraints, the collected data through primary means was considered suitable for the purpose of the study.


5.4 Suggestion for Future Studies

No research conducted can claim to have absolutely and conclusively covered the scope of its studies for the reason, I would wish to recommend to other research on this topic “THE MANAGEMENT OF FOREIGN EXCHANGE RISK AND CORPORATE PERFORMANCE IN NIGERIA to conduct a replica and more expensive research on, it is study in the light of new deals.


The Management Of Foreign Exchange Risk And Corporate Performance In Nigeria Economy (A Case Study Of United Bank Of African Plc, Ilorin)


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