IMPACT OF EXCHANGE RATE AND INFLATION ON COMMERCIAL BANKS’ PERFORMANCE IN SIERRA LEONE

Abstract

This study was initiated with the intention of examining the impact of exchange rate and inflation on the performance of commercial banks in Sierra Leone. The study utilises data for all commercial banks in Sierra Leone during the period 2009Q1-2020Q2. To measure the performance of commercial banks, Return on Equity and Return of Asset were used as the dependent variables, while inflation and exchange rate as the independent variables in the two model equations. In a bid to address the objectives of the study, the Auto Regressive Distributed Lag model was used. The findings indicate that inflation has a positive effect on banking sector performance, while exchange rate exert negative spillover effect on the overall economy. Since inflationary pressures are common phenomenon to macroeconomic stability, which normally impact on the performance of commercial banks, it is therefore recommended for both the monetary and government authorities to work collaboratively as a way of addressing exchange rate pressure. This will make it worthwhile for the banking system to serve its purpose of championing sustained growth and development in Sierra Leone.