Impact of Foreign Exchange Activities on Commercial Bank's Profitability in Bangladesh

Abstract

This study aims to explore the impact of banks' foreign exchange (FX) activities on their profitability over a period of ten years, from 2014 to 2023, using a sample of ten commercial banks in Bangladesh. The focus is on how factors such as imports, exports, remittance flows, costto-income ratio, interest rate spread and capital adequacy ratio affect the profitability of banks. The study uses one dependent variable to measure profitability: year-end non-interest income (NII), which represents the revenue banks generate from activities outside of traditional lending. According to Model specification test & Diagnostic test, the random effects model is more appropriate for this paper. And according to random effects model, three significant variables have found such as Remittance, Interest rate spread and Capital adequacy ratio. These findings suggest that banks can improve their profitability by strategically enhancing their foreign exchange activities. For example, by increasing support for Rem, IRS and CAR transactions, banks can generate more non-interest income through the associated fees and commissions. Furthermore, fostering remittance inflows can significantly boost non-interest income. Therefore, effective management of foreign exchange operations is crucial for improving the financial performance of banks in Bangladesh. In conclusion, the study underscores the importance of foreign exchange activities in shaping the profitability of commercial banks in Bangladesh. The relationships between Rem, IRS,CAR, and profitability are clear and significant. Banks that effectively manage and leverage these factors can enhance their non-interest income, leading to greater overall profitability. Given this research offers valuable insights for both banking executives and policymakers aiming to improve the performance of the banking sector in Bangladesh. By focusing on these key elements of foreign exchange business, banks can secure long-term financial growth and success