By Kitabu Jammeh
Abstract
This study provides empirical evidence on the relationship between the growth of the foreign exchange market and the profitability of Gambian commercial banking industry. It uses non-interest income made by banks from January 2005 to June 2012 although the initial intention was to collect data from 2007 to June 2012 assessing the periods by quarters. This was because the Central bank data (Balance Sheets) made available to me for the period under study could only show income of banking industry
in the form of either interest or non-interest income. I have already been reliably informed that the foreign exchange income constitutes a considerable proportion of the yearly non-interest income of banks.
A total of 30 observations were made over a period of seven and a half years. Related literature on Gambian FX market was hard to come by as a basis for comparison, thus literature from other countries has been used as basis for comparison. It should however, be noted that, good data relating to
Growth of the foreign exchange markets and impact on profitability of banks was not easily available. Increases in transaction volumes of FX are negatively correlated to profitability of banks and the banking industry, suggesting that as total volume of FX transactions increase profitability of banks decreases.
My findings also proved that volume of FX sales increases profitability while purchases decrease profitability, but the sale of FX increases profitability by a much greater proportion than the losses due to purchases. Finally, the relationship between exchange rates and interest rates is inverse. As the exchange rate decreases, the interest rate increases, but on the other hand, the exchange rate has a direct relationship with inflation. The two move in the same direction. The results on a broad basis are not inconsistent with the past findings made elsewhere.
