Abstract:
Various companies from different countries are looking for new growing opportunities beyond their homeland, because of the increasing business competitiveness. In the modern world, all the financial systems are depending on the banking sector. Because they play a major role as a financial intermediary, mobilizing savings from economic surplus units to economic deficit units. Therefore, banks also involve international trade, for this reason, it’s important to study at the behaviour of exchange rate fluctuation and bank performance. This study employed a quantitative research approach to accomplish the objective of the study is to examine the effect of exchange rate fluctuation on the financial performance of the Sri Lankan banking sector. The target population of this study is all 32 banks operating in Sri Lanka according to the Central Bank of Sri Lanka in 2019. From the population, 17 banks were taken as the sample. The sample was taken according to the availability of data from 2012 to 2018 time period. This study used secondary data sources and data was collected from different sources such as, inflation rate from Department of Census and Statistics, exchange rates statistics from publications of the CBSL annual reports and data on the bank specific factors such as interest rate spread, bank size, liquidity ratio, capital adequacy ratio from the published audited annual reports of banks within the study period. The study used STATA to analyze the data. The banking sector financial performance is a dynamic and persistent variable. Therefore, researcher use the Two Step system Generalized Method of Moments (GMM) dynamic panel model estimator. The study found that significant negative relationship between foreign exchange rate fluctuations and the financial performance of the banking sector in Sri Lanka in the study period. The study recommended that the government to protect the value of the domestic currency by formulating policies and monitoring and managing fluctuations in the foreign exchange rate. For bank management, the study suggests that hedging policies should be implemented to reduce the foreign exchange risk created by banks due to exchange rate fluctuations.
