DATA ANALYSIS AND DISCUSSION OF FINDINGS
4.0 Introduction
This chapter presents the data that was collected through the interview between the researcher and the respondents at the UT Bank, Ghana and the discussion of findings. The interview at the UT Bank Ghana sought to examine foreign exchange risk management in a selected commercial bank in Ghana. The interview was meant to achieve the main objectives of the study which were to evaluate the potential sources of foreign exchange risks at UT Bank, to investigate the effects of foreign exchange risks on profitability and to examine the challenges in managing foreign exchange risks at the UT bank. Information obtained was based on the responses from the interview the researcher conducted with the officials of the risk department of the bank. Among the officials were the credit risk officers, operational risk managers, treasury sales officers and money market (treasury) supervisors.
4.1 Foreign Exchange Risk and types of risks faced by the Bank
When the respondents were asked about their understanding on foreign exchange risk, a supervisor from the risk department answered that foreign exchange risk is a risk arising from foreign exchange transactions, thus a risk that exist when a financial transaction is denominated in a currency other than that of the base currency of the company. The effect unanticipated exchange rate changes have on the value of a firm. A potential gain or loss that occurs as a result of an exchange rate change. Collectively, exchange rate risk relays to the effect of unforeseen exchange rate changes on the value of a firm (Madura, 1989).
Another official in the department associated foreign exchange risk to the price variation associated with the trading among currencies. In the credit risk officer's view, foreign exchange risk is the risk a bank may suffer as a consequence of adverse exchange rate movement during a point in which it holds an open posture, either position or forward or both in some foreign currency. The staff understanding of foreign exchange risk affirms the literature by Jacques (1981) and Abor (2005) who viewed Foreign exchange risk additional variability experienced by a multinational corporation with its worldwide consolidated benefits that results from unanticipated currency fluctuations.
4.1.1 Types of Risks faced by UT Bank
In order for the researcher to know the types of risks associated with the bank, the researcher asked the respondents about the types of risk their institution faces. The study revealed the following risks faced by UT Bank; transaction, translation, economic risks, settlement risk, interest risk and currency risk. The officials indicated through the interview that, transaction, translation and economic risks are the common risks faced by the UT Bank, whiles settlement, interest, currency and market risks are other risks they don't encounter often.
The types of risks revealed by the UT Bank are in relation with what Van Deventer, Imai and Mesler, (2004) indicated in their study. They suggested that transaction, translation and economic risks are exchange rate risks that are exposed to a firm and moreover, crucial strategies and management decisions must be put in place in order to manage these exchange rate risks.
4.2 Potential sources of Foreign Exchange Risk at the Bank
Concerning the possible sources of foreign exchange at the UT Bank, it was revealed through the officers at the foreign exchange department at the bank that foreign exchange risk comes through the purchases and sales of foreign currencies, investments (fixed deposit) and loans denominated in foreign currencies. The interviewees indicated that when financial institutions transact businesses in foreign currency, for instance, the US Dollars or any other foreign currencies, the institution is likely to run into what is called, the foreign exchange risks.
They further showed that tradable assets and importation of goods paid in foreign currencies also results into foreign risks of banks. The officer in charge of the treasury sales revealed that in connection with the sources of foreign exchange risk, the UT bank does not make its foreign assets with its corresponding liabilities.
In addition, the Credit risk officer at the bank indicated overweight tradings, money market deals, swaps and foreign exchange deals are the possible sources of foreign exchange risks. The manager in the risk department of the bank indicated through the trading activities of the bank such as the purchases and sale of foreign currencies to complete international trade transactions, speculative and hedging purposes. However, a study by Bernard Jagre Walley (2015) shown that foreign exchange risk is as a result of inflation rate, broad money growth and consumption growth.
4.3 Challenges in Managing Foreign Exchange Risk
Managing risks, especially foreign exchange risks comes with some challenges.
On the major challenges in managing foreign exchange risk at the UT Bank, the respondents revealed that high volatility of the foreign exchange markets, high demand for foreign exchange and lower supply of foreign exchange make the management of foreign exchange risk problematic.
4.3.1 High Foreign Exchange Rate Volatility
Another interviewee indicated that increased foreign exchanged volatility and regulatory scrutiny from the Bank of Ghana (BOG) as well as a low-yielding investment poses a great challenge to the foreign exchange risk management. High volatile exchange rates are among the most striking issues that affects the banks.
4.3.2 Unforeseen Monitoring Policies
Other unforeseen monitoring policies, unclear individual gap limits, aggregate gap limit and compliance with limit, unpredictable market behaviour, speculative trends makes the management of foreign exchange risk difficult.
Furthermore, the researcher wanted to find out what causes the challenges in managing foreign exchange risk. The study revealed that the foreign exchange risk management challenge is a nation or macroeconomic issues in that the central bank is not able to supply enough foreign exchange to meet the demand of the commercial bank. The increased in the use of new currencies, new developments in global regulations since the year 2008 financial crisis, differences in interest rate, differentials in inflation and terms of trade.
4.3.3 Management Commitment Issues
'One of the officials who were interviewed indicated that though the team that manage risk at the bank understands the issue of risk management but few are committed to its implementation. Thechief risk officer of the bank revealed that the unwillingness of some branch managers and credit officers to implement credit policies as stipulated by the bank, has affected the bank's risk management effort. He explained that most of the credit officers advance credit without following the lending principles, leading to higher non-performing loans'.
4.3.4 Communication of Risk Management Challenges
One of the major challenges as indicated by one of the respondents of the bank was credit management practice and its inability to effectively communicate and educate both management and non-management staff on the need to make risk management part of their day-to-day operations.
4.3.5 Insufficient Funds to Effectively Manage Risk
It was also discoveredduring the interview that though the bank has a risk department organised into credit control, recoveries and operational department control, the department is not well resourced to effectively carry out its responsibilities as a risk management department. For example, in the areas of operations they need competent personnel who have been trained and developed with the necessary resource to reduce operational risks in their day to day dues.
The foreign exchange risk unit has the responsibility of reviewing all risks, to which the Bank is exposed, assess from time to time their relative importance and evaluate whether the resources and controls designed to manage each risk are proportionate to the quantum of risk involved. In regards to this, the officer in charge of the risk department explained that 'it requires recruitment of competent and experienced staff. However, the funds devoted to manage risk are woefully inadequate'.
4.4 Effects of the Challenges on foreign Exchange Risk
With regards to the effects of the challenges on foreign exchange risk, the officials at the bank who responded to the interview questions indicated that one main effect of the challenges on foreign exchange risk is revaluation losses or gains. Revaluation losses or gains occur as a result of the changes in rate. For example, if a client is given 100 dollars, and there is the need to avoid any foreign exchange rate risk. It implies that the amount have to be hold and be given back as loan. But the moment the dollar is changed and is given back as a loan, it means the client is going to pay back.
It was further revealed that, the effects of the challenges on foreign exchange risk leads to bank loses and affects the soundness of the banks and their overall financial stability.
However, in order to know the measures in place by the UT Bank to manage the challenges on foreign exchange risk, respondents indicated that their bank has a risk department which monitor risks in the institution. The bank organises training and development programs to increase the understanding and the emerging issues on risks. The regulator of financial institutions in Ghana (BOG) also promotes sound practices through their policies and they also provide supervisory guidance to the bank. Hedging strategies and other techniques or tools such as future contracts have been used by the bank to deal with the foreign exchange risk challenge.
4.5 Foreign Exchange Risks and Profitability
After knowing the possible risks and their sources at the bank, the researcher wanted to understand whether the risks indicated by the officials at the bank affects the institution's profitability. All the interviewees noted that foreign exchange risks truly affect the profitability of the bank.
However, when it came to how it affects the bank's profitability, their views were dissimilar. An officer at the risk department revealed that foreign exchange risk affects the profitability of the bank in the sense that the bank requires more cedis to purchase USD to meet USD commitments and this impact negatively on the cedi position of the bank. To solve the cedi position, the bank needs to borrow at a high rate on the interbank market to meet its CRR and cedi commitments. This in turn leads to high interest expense which erodes the banks interest expense.
Another employee indicated that, foreign exchange risk affects profitability because when a bank hold assets or liabilities in foreign currencies and imparts the earnings and capital of the bank due to the fluctuations in the exchange rates, there is an uncertain movement that poses a threat to the earnings or profitability of the bank if movement is undesired.
Moreover, it was revealed that there could be a maturity mismatch or revaluation losses depending on the banks' positions. The exchange rate could also alter expected amount of principal or return of some lending or investment to the institution. In linkage with how foreign exchange risk affects profitability; Fortura and others (2007), indicated in their literature that, a strong currency makes domestic exports expensive. Therefore foreigners will buy fewer goods from that country. The net effect of this trade imbalance is a fall in exports and rise in imports, which in one way or the other, affects the financial institutions of the country.
Lastly, concerning foreign exchange risk on profitability, the respondent pointed out that when there is fluctuation depending on the direction of the fluctuation may lead to a loss or gain of the bank.
4.6 Strategies adopted by UT Bank to Manage Foreign Exchange Risks
The researcher sought to find the strategies that UT Bank have adopted to manage its foreign exchange risks. According to the manager in the risk department of the bank, the bank engages in swap funds limit, position limits, counter party and dealer limits manage the foreign exchange risks of the bank.
4.6.1 Swap Funds Limit
You are managing the balance sheet in such a way that when there are any losses or gains you accommodate. There is no banking without a swap. But the limits will guide you base on your balance sheet price.
The swapped funds limit sets a maximum level of funds that can be swapped from foreign currency (FCY) to local currency (LCY). Where applicable, a similar maximum constraint may be applied for swapping local currencies to foreign currencies.
If structural imbalances such as funding LCY assets with FCY funds through the FX swap markets grow disproportionately over time (compared to the balance sheet size, market, FX turnover or credit lines to the bank), they can eventually adversely impact the day-to-day liquidity position of the bank & so potentially cause a liquidity
4.6.2 Position Limit
Position limit: thus where you want to buy, hold and make money out of it. This is due to the fact that the market conditions are not known so it depends on the limits. There can be a short limit and you can be making money and a long limits and you can be making money depending on the pricing of the rate if there is no limit and you lend $10,000,000 and your clients are not able to pay there will be a problem.
4.6.3 Market Risk officers
There are market risk officers who are employed by the company to scrutinise foreign transactions. These market officers also help to mitigate losses at the bank.
4.6.4 Hedging Settings
This is another appropriate too employed by the bank to manage foreign exchange risks. According to one officer at the risk department, hedging setts appropriate limits on open position, clear cut dealer limits for treasury sales and well defined division of responsibilities between front, middle and back office. The study by Papaioannou (2006), showed that there need to be suitable approaches to manage risks that affect firm. These policies however, depend on the type of risk that affects the firm and the size of the firm.
Specifically, transaction risk is often managed strategically or tactically to reserve cash flows and earnings, depending on the business's treasury view on the future actions of the currencies involved. Many businesses use tactical hedging to hedge their transaction currency risks in regards to short 'terms receivables and payments. Strategic hedging on the other hand is used for longer-period transactions. Some firms choose to use passive hedging, which encompasses the maintenance of the same hedging construction and execution over regular hedging periods, irrespective of currency expectations.