The impact of exchange rate volatility on commercial bank profitability in Zambia (2005-2017)

Given that empirical work has revealed that the relationship between bank profitability and exchange rate fluctuations is inconclusive. This study assessed the impact of exchange rate volatility on bank profitability in Zambia. Monthly-secondary time series data was collected from the Bank of Zambia for the period 2005 to 2017. The study employed the GARCH (1,1) model to measure real exchange rate volatility and Autoregressive Distributed Lag (ARDL) model was adopted to establish the relationship between exchange rate volatility and bank profitability. The findings from the GARCH (1,1) model revealed that the real exchange rate was volatile in Zambia for the period under consideration. Further, the ARDL model showed that real exchange rate volatility had a positive relationship with bank profitability in the short run while in the long run a negative and insignificant relationship was found. The study concluded that banks do not rely on the premium from selling foreign exchange to remain profitable and competitive in the business. The results implied that the more volatile real exchange rate becomes the lower the bank profitability hence the need to manage exchange rate volatility if bank profitability is to be improved. Key Words: Real exchange rate, Volatility, bank profitability, GARCH (1,1) model, ARDL Model, Zambia