The Effect of fixed versus floating exchange rate on financial performance of commercial banks in South Sudan
Tenoy, Samson Kipkorir
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The financial sector plays an important role in Sub-Saharan countries, more so for South Sudan which is the youngest nation in Africa. More significantly, the adoption of a floating or fixed exchange rate regime affects the performance of commercial banks, hence the need to focus on it. This study aimed at establishing the effect of fixed verses floating exchange rate on the performance of commercial banks in South Sudan. Specifically, this study sought to: determine how fixed exchange rate affects the financial performance of commercial banks in commercial banks in South Sudan and to establish how floating exchange rate affects the financial performance of commercial banks in South Sudan; The study adopted a comparative descriptive research design and the population of the study was 30 banks operating in South Sudan between the months of December 2019 to December 2020. A sample of three foreign banks and two local bank was selected. Secondary data was collected and analysed through multiple linear regression. The study results indicated that the performance of foreign banks was affected by the exchange rate during the fixed exchange rate era (p<0.05) while performance of local banks was not affected by the exchange rate during the fixed exchange rate era (p>0.05). Results also showed that floating exchange rate affected the performance of all banks positively (p<0.05). Further, the study findings indicated that there is a significant effect (p = 0.008) of the effect of exchange rate volatility on the financial performance of banks in South Sudan. The study concluded that, first, fixed exchange rate regimes are more fragile in a world of intense financial integration; floating exchange rates are also conducive to enhance banks performance. In fact, in developing countries, banking crises occur more often in an environment of flexibility of the exchange rate. Finally, the study concludes that the consensus view that emerging countries should allow for more exchange rate flexibility as a means to enhance financial performance and to curb the effects of exchange rate volatilities. The study makes the following research recommendations: developing countries financial sectors should move away from the fixed exchange rate regime and to allow for more flexible exchange rates, countries which choose to maintain a fixed exchange rate, have to move in the direction of increasing the cost of a devaluation and enhanced supervision of the banking systems.