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Prague University of Economics and Business

Faculty of Finance and Accounting Department of Banking and Insurance

The Impact of Exchange Rate on Financial Performance of Lebanese Banks

Author: Bc. Ahmad Kabrit

Thesis supervisor: prof. PhDr. Petr Teplý Ph.D.

Year of Defense: 2021

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Declaration:

I hereby declare that the master's thesis presented here is my own work. All the literature and sources used are fully stated as references.

Prague, day... Signature

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Acknowledgements

I would like to express my sincere gratitude to my supervisor prof. PhDr. Petr Teplý Ph.D. for his valuable advice, constructive suggestions, and objective critics during the whole process of thesis writing. At long last, I might likewise want to thank my loved ones for their unrestricted love and backing.

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Abstract

The main aim of this thesis is to identify the effect of fluctuations in the exchange rates of the main foreign currencies circulating in Lebanon on the financial performance of the banks listed on the Lebanese Stock Exchange, as the following financial performance indicators were relied upon: return on assets, return on equity, return per share, turnover rate the stock, and the market value of the bank’s share during the period from 2016 to 2020, as the study included the four main banks listed on the Lebanese Stock Exchange, and a comprehensive comparison of the exchange rates. The subject of the study, and the researcher used several statistical methods, and the study concluded with a set of results, the most important would be: a clear statistically significant effect of fluctuations in exchange rates at a level of significance (α ≤ 0.05) on any of the banks' financial performance indicators. The results of the study were different from the results of many previous studies. The study recommended the necessity of conducting more studies to determine the factors affecting the financial performance of the banks listed on the Lebanese Stock Exchange.

Key words: ROA, ROE, EPS, DW, Pearson Correlation, Stock Turn over

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Master's Thesis Proposal

Faculty of Finance and Accounting

Prague University of Economics and business

Author: Bc. Ahmad Kabrit Supervisor: Doc. PhDr. Petr Teplý, PhD.

E-mail: Ahmadkibrit@gmail.com E-mail: petr.teply@vse.cz

Phone: 776358887 Phone: 222 112 326

Specialization FFU Defense

June 2021 Proposed Topic:

The Impact of Exchange Rate on Financial Performance of Lebanese Banks Motivation:

The exchange rates in the foreign labor market are witnessing an upward and downward movement in the absence of the national currency in the Lebanese economy, which may lead to an impact on the financial performance of the banks Listed on the Beirut Stock Exchange, and with its awareness, this research came to shed light on the impact of exchange rates on the financial performance of the legal entity listed on the Beirut Securities Exchange is through a more important measure of financial indicators.

The Aim of the study is to show the impacts of the Lebanese exchange rate on the financial performance of the banks that are underlisted through the Lebanese securities exchange from year 2016 through 2020. The Thesis will be using several financial and performance tools and indicators such as the value of the Lebanese bank shares and Earnings per share - EPS and the Returns on Equity and assets – ROA, ROE. Banks will be divided into two groups: big and small (according to volume of their assets).

The study seeks to achieve the main objectives as to Determine the reality of exchange rates and their impact on one of the most important sectors of the Lebanese economy, the banking sector; to identify the nature and direction of the exchange rates through the circulating currencies and the high performance of the big banks on the conditions of the block in Beirut and identify the indicators used in measuring their financial performance and analyze the extent of their ability to optimally utilize their available resources

The Thesis will be circulating all the Lebanese banks that are underlisted through Beirut Stock Exchange. To reach the administrative goal of the Thesis, the research will tend to follow an analytical approach as it will be the number one study phenomenon within Performance approach. Regarding the financial approach, several statistical methods will be derived throughout the financial data accumulation such as correlation coefficient to predict the linear regression tests backfiring the hypothesis.

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Hypothesis:

Methodology:

Expected Contribution:

Outline:

- Hypothesis #1: Big Lebanese banks reported higher profitability than small banks in the observed period (in local currency LBP)

- Hypothesis #2: Financial performance of small Lebanese banks was affected by exchange rate movements more significantly than financial performance of big Lebanese banks in the observed period

Based on the nature of the study, the objectives it attended to be achieved, and the flexible data obtained for the purpose of studying the effect of exchange rate on the financial performance of the banks listed on the Lebanese Stock Exchange, and based on the arguments that the study will ought to answer, this study will be based on the descriptive approach as being the most appropriate curriculum for the phenomenon, by following two methods, the first method is to rely on previous research and studies that dealt directly or indirectly with the subject of study, as well as books and pamphlets to cover the theoretical background, in addition to relying on the annual reports of banks confiscated from the Lebanese Stock Exchange.

This study contributes to enlightening the banking administration about the conditions of banks, which enables them to take the necessary measures to support its policies and protect them from risks in a way that will have a positive impact on the Lebanese economy. And to show the importance of the study from the general point of view, as this study is considered one of the limited studies, according to the researcher the following deals with the Exchange rate fluctuations and their impact on the financial performance of the banks listed in the Stock Exchange. This study contributes to opening new horizons for researchers and those interested in the field of scientific research.

- Introduction

- Literature review and research hypotheses - Theoretical background

- Basic Principles of Exchange rate

- Monetary system and exchange rate regimes - Basics of banking

- Bank financial performance - Methodology

- Empirical analysis

- Descriptive Analysis of LBP/USD

- Descriptive Analysis of financial performance of banks - Empirical model

- Summary of results and comparison with other researches - Conclusion

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Core Bibliography:

Date of submission: May 2021

Date of defense: June 2021

Author Supervisor

- MEJSTŘÍK, Michal, Magda PEČENÁ a Petr TEPLÝ. Bankovnictví v teorii a praxi:

- Banking in theory and practice. Praha: Karolinum, 2014. ISBN 978-80-246-2870-7.

- Halil Fidan, " Impact of the real effective exchange rate (REER) on turkish agricultural trade World Academy of Science Engineering and Technology Vol 2 , 2008.

- Ng Yuen-Ling, Har Wai-Mun, Real Exchange Rate and Trade Balance Relationship: An Empirical Study on Malaysia, International Journal of Business and Management, Vol. 3, No. 8, p130-137, 2008.

- Halamka, R., Teplý, P. (2017). "The Effect of Ethics on Banks’ Financial Performance", Prague Economic Papers, Vol. 26, No. 3, pp. 330-344

- Kuc, M., Teplý, P. (2018). A Financial Performance Comparison of Czech Credit Unions and European

Cooperative Banks. Prague Economic Papers, Vol. Vol. 27 No. 6, pp. 723-742. https://doi.org.10.18267/j.pep.682

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1 Introduction

Currency is one of the most important economic tools of a state in order to be able to establish commercial relations with other countries, it needs to evaluate the exchange rate of its currency against the exchange rate of other countries' currencies periodically to know the purchasing power of its currency The exchange rate plays an important role in international economic activities, whether those activities are commercial or investment or service, as it occupies a pivotal position in technical policy, because it is used as a tool or as an indicator that measures the competitiveness of the country's economy. The banking sector is considered one of the most influential economic sectors affected by the exchange rates and their enhancements, because this sector has a fundamental role in the economy and business in any country, as the banking sector has a great role that cannot be ignored in economic development, and it is considered one of the most important economic tools through which the state tolerates its monetary system and financial policy, and the banking sector gives a key indication of the vitality of the economic situation in the country, through the various banking services it provides which stimulates commercial economic operations. Therefore, it was necessary to evaluate the performance of banks and the extent to which they were affected by economic variables such as exchange rated.

The presence of currency coins circulating in the Lebanese economy and every currency belonging to a country whose economic conditions differ from the other, in the absence of the national currency clearly indicates that the Lebanese economy in all its sectors is dependent and affected by changes. The incident in the exchange rates of the currencies traded in it (Khidr, 2012) finds that trade in the foreign exchange market has become a major player in the investment market, since the beginning of the spread of brokerage firms in general. From speculation and the accompanying rapid and high fluctuation in currency exchange rates, especially after many of them suffered heavy losses because of their ignorance of the mechanisms of speculation.

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2 The problem of the study is the exchange rates in the foreign exchange market are witnessing an active movement of up and down in the absence of the national currency in the Lebanese economy, which may lead to an impact on the financial performance of the banks listed on the Lebanese Stock Exchange. Therefore, this research has come to shed light on the impact of exchange rate fluctuations on performance, thus the study problem can be formulated with the following main questions:

- Does Big Lebanese banks report higher profitability than small banks in the observed period (in local currency LBP)?

- Is the Financial performance of small Lebanese banks affected by exchange rate movements more significantly than financial performance of big Lebanese banks in the observed period?

The importance of this study seeks to know the effect of fluctuations in currency exchange rates on the financial performance of the banks listed on the Lebanese Stock Exchange, which is beneficial to many parties, whether they are investors, shareholders, institutions or individuals. Additional information helps them to preserve their investments, achieve the greatest possible return and bear the least possible losses. This study also contributes to informing the banking administration of the conditions of these banks, enabling them to take the necessary measures to support their stability and protect them from risks in a way that has a positive impact on the Lebanese economy. The importance of the study is highlighted from the scientific point of view, as this study is considered one of the limited studies according to the researcher's knowledge that dealt with fluctuations in currency exchange rates and their impact on the financial performance of banks listed on the Lebanese Stock Exchange. This study also contributes to opening new horizons for researchers and those interested in the field of scientific research and the structure of the thesis is as follows.

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3

Theoretical Background

2.1 Literature Review

In this chapter we deal with the literature review of previous studies related to similar topic. Al- (Najjar, 2013) aimed to test the relationship between financial leverage in Lebanese public shareholding companies. On the one hand and the financial returns of these companies on the other hand, depending on the accounting measures such as return on assets, return on equity, return on sales, the rate of sales growth and the market value of the company that was calculated according to the Tobin's 4 model, and the study population may be represented by the public shareholding companies. Where a sample consisting of twenty companies was selected after fulfilling certain conditions during the study period (2004 - 2011), and statistical methods were used from regression models to analysed data and test hypotheses on the basis of time lag, and the study concluded that there is a negative impact of raising the financial on the measures of accounting performance : Return on assets, return on equity, return on sales, the rate of sales growth and that this effect extends to several years to come. The study assess a financial structure for the purpose of reaching the optimum rate of leverage within the financing structure in order to ensure the positive impact of financial leverage on the financial performance and market value of these companies, and the necessity of adopting laws that allow companies to use bond loans and other financial tools.

(Khader, 2012) study aimed to clarify the economic effects of changes in the exchange rates of the currencies circulating in the Authority regions on the macro indicators of the economy during the period 1994-2010, and to define the direction of these effects and the nature of their impact on public revenues and expenditures as well as total exports and imports, clarifying the relationship between the exchange rate and inflation, and to achieve these goals, appropriate statistical methods were used from simple linear regression models and time series models to analysed data and choose hypotheses, and the study concluded that there is a direct relationship between total imports and the real effective exchange rate of imports, and the existence of an inverse relationship between the nominal exchange rate and the rate of inflation, and that the absence of a national currency makes the Monetary Authority not governing the interest rates imposed by the banking system on deposits and facilities as the interest rate imposed by banks on loans is double The interest rates imposed by the banks of the countries that issue these currencies.

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4 (Darwish, 2009) study aimed to test the relationship between return and risk in the Stock Exchange considering the global financial crisis, and to determine the market’s ability to compensate investors with a risk premium. As well as assisting decision-makers in setting up a general policy to monitor market performance and guard against undesirable possibilities. The study used the Stock Exchange Index “Al-Quds Index during the period 10/17/2000 to 8/16/2009, and descriptive statistics were used, and it was also applied. The serial correlation conditional variance non-chat model, or what is known as the GARCH model, is to analyse the data and choose the hypotheses. The serial correlation conditional variance uncertainty model was applied, and the study concluded that there is a positive relationship between risk and interest in the Stock Exchange, but it was not relevant to a statistical significance, which indicates that the relationship between the return and risk is narrow, and thus the global financial crisis does not directly affect the market and the financial reports issued by companies operating in the Stock Exchange, which benefit the various parties in the market in determining the level of risk that they accept.

(Nesman, 2008) study aimed to measure and analysed the extent of commitment of companies listed on the Stock Exchange. Financial statements according to International Accounting Standard No. (21) the effects of changes in foreign exchange rates from the point of view of the compilers of the financial statements and external auditors for these companies to apply the requirements of this standard, and a statement of the advantages that companies achieve for their application of IAS No. 21, and the study community is represented by all companies listed on the Stock Exchange, with the exception of the banking sector, the descriptive and analytical approach was used to obtain data and information related to the theoretical aspect, and a questionnaire was designed to collect data related to the subject of the study, and statistical methods such as the analysis of variance test were used to analysed data and test hypotheses, and the study concluded that the companies listed on the market Securities Exchange adheres to the requirements of International Accounting Standard No. (21) from the viewpoint of both list compilers the results of the financial statements and external auditors for these companies also showed that transactions that take place in foreign currencies are recognized and measured, which indicates the companies ’commitment to the standard related to how to recognize and measure, and that companies achieve advantages from applying the requirements of the standard including improving the users’ decisions and financial statements. The experiences of Arab countries regarding international accounting standards, especially Egypt and Saudi Arabia.

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5 (Abu Zuaiter, 2006) study aimed to identify the factors affecting the resilience of commercial banks operating and shed light on the conditions of commercial banks and the indicators used to measure their performance. Also, the study aimed to find out the sources of commercial banks ’funds and their uses and to predict the profitability of commercial banks through the factors affecting them using the model deduced from the study. The study population consisted of all the 18 traditional commercial banks operating, which amounted to 18 commercial banks.

A sample consisting of seven commercial banks was selected during The period from (1997- 2004), the study followed the descriptive and analytical approach in collecting and analysing data and information using various statistical tests such as simple and multiple linear regression analysis and correlation coefficient to analysed data and verify the correctness of hypotheses, and the study concluded that the performance of commercial banks operating has been affected the political and economic conditions that the Palestinian territories are going through, especially after the famous "Intifada" this is where customer deposits and credit facilities decreased during the period 2001-2002, and the study showed a significant direct relationship between net interest, property rights, number of employees, at branches on the one hand, and the profitability of commercial banks, measured by the return on assets and return on property rights, as the study showed. The existence of an inverse relationship between the special provision to the total facilities, the profitability of the banks, as well as between the ratio of cash liquidity and the stubbornness on the assets, and the study recommended the necessity for banks to diversify their investments in order to reduce risks, and to pay more cash liquidity due to its impact on the profitability of banks, as it recommended the necessity working to increase the size of financial leverage to the maximum extent possible for its impact on profitability.

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6 (Abd al-Zahir and al-Faqih, 2011) study aimed to identify the impact of a number of financial and accounting variables in the share prices of companies listed on the Stock Exchange, and those factors are the return on equity and return on assets, the share of net profits, the trading ratio, and the asset turnover rate. The study population may be of all the industrial companies that are public shareholding and listed in the Stock Exchange The financial companies, which numbered 10 companies, during the time extending between the years 2004-2008. The study used the descriptive analytical method as it is the most suitable method for the study. Statistical methods were used from regression models to analyse data and test hypotheses. The study recommended the necessity for companies to disclose information that affects the share price and the need for continuous review of the published financial information to ensure its accuracy, as the study recommended to the responsible authorities the necessity of working on licensing investment analysis institutions according to appropriate standards to help investors in the market determine the real prices of traded securities.

(Kharbash, 2012) study aimed at knowing the impact of exchange rate risks on the performance of the stock portfolio in Amman and Saudi Arabia, analysing the reality of securities portfolios in the stock exchange and analysing the financial returns and risks related to them based on statistical methods. Studying the possibility of reducing systemic risks through the international diversification strategy in the Amman and Saudi Stock Exchanges and indicating the positive or negative impact of exchange rate risk on the stock price returns on the stock exchange. The study sample was chosen from the shares of the best companies listed in both the Amman and Saudi Stock Exchanges during the year 2010 and the study followed the descriptive approach. Analytical collection of data and information using statistical methods such as descriptive statistics and correlation coefficients to analyse data and validate hypotheses, and the study concluded that the number of financial assets included in the composition of the portfolio as well as the correlation coefficient between the returns of financial assets that make up the stock portfolio contributes significantly to reducing systemic risks. The results also showed that the risks arising from exchange rate fluctuations affects the performance of the securities portfolio, and the study recommended the necessity of identifying the types of market risk and analysing it accurately before making an investment decision. It also recommended the necessity of conducting a periodic review of the securities portfolio considering the continuous flow of information and choosing an appropriate policy to cover exchange risks according to economic conditions.

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7 (Al-Sondos and Al-Momani, 2012) study aimed to identify the effect of changes in the shares of public joint-stock companies in the services sector resulting from the fluctuation of exchange rates. The Jordanian dinar against the prices of the main foreign currencies, and to identify the trend of changes in the prices of the shares of public joint-stock companies in the services sector, as the study population is represented by the public joint-stock companies in the services sector listed on the Amman Stock Exchange, which are 58 companies, and seventeen main currencies were chosen, namely One of the most common currencies that Jordan deals with, and the study covered the monthly data for the period extending from January 2006 to June 2011. Descriptive statistical approach and multiple linear regression model were used to analyse data and test hypotheses. The study concluded that the companies 'stock prices affected a lot at the exchange rates of the Jordanian dinar against the currencies of the countries in which witnessing an active service trade movement between them and Jordan, such as the countries of the European euro zone, where the results showed that the effect of increasing the Jordanian dinar exchange rates against the European euro, the Danish krone and the Swiss franc was positive on the share prices of Jordanian services companies.

(Ba'amarah, 2013) study aimed to know the effect of changes in the exchange rate on the performance of the commercial bank. The relationship between the bank’s revenues from its main activity and its revenues from the secondary activity and identifying the extent of the Algerian Yetok’s approach in financing foreign trade. On this basis, the Algerian People's Loan Bank was chosen as a sample for the study for the period 2002-2011, and the descriptive and analytical approach was used for the theoretical, historical and experimental aspect of the case study. And by relying on statistical analysis tools, statistical methods such as regression analysis, data analysis and hypothesis testing have been used with the help of Excel program, and the study concluded that exchange revenues contribute well to increasing the net income of the link, and the study recommended the need to control monetary indicators and diversify sources of obtaining hard currency and the encouragement of national exports.

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8 (Nawfal et al., 2012) study aimed to analyse the ability of Jordanian industrial companies to make the best use of the resources available to them from the relationship between the profits achieved in these companies and the volume of investments in them, as well as the ability of these companies to generate positive cash flows from the resources available to them through the rate of return achieved, as well as identify the operational efficiency of the companies under study and verify the extent of their ability to manage the rates. It undertakes its responsibility in a manner that does not conflict with its profitability, as well as identifying the extent to which these companies are able to determine the appropriate financing mix, and the study community is represented by the industrial public joint-stock companies and the study followed the descriptive and analytical approach using the simple and multiple regression analysis method to analyse data and verify validity. The study concluded that there is a statistically significant relationship between the financial leverage and the different rates of return, as well as the existence of a statistically significant relationship between the operational leverage and the rates of return, and also the existence of a statistically significant relationship between the rate of asset turnover and the share of profits, and the study recommended that it work companies to increase their operational efficiency through the use of lower rates of operational leverage and the necessity for companies to search for financing sources other than external borrowing such as equity financing or the issuance of common shares.

(Tayfour, 2011) study aimed to identify the relationship between capital spending and the financial and operational performance of Jordanian pharmaceutical companies, and it also aimed to identify the mechanism for making a decision on capital spending in these companies.

The study population consisted of all the 13 pharmaceutical companies in Jordan during the period 2005-2009. A sample consisting of 5 companies was chosen. The study followed the descriptive and analytical approach to address the theoretical and applied side using statistical methods from the simple regression method to analyse the data and verify the validity of the hypotheses to achieve the objectives of the study. To assess capital spending by companies in order to make rational investment decisions, the study also recommended the need to study sources of financing and their impact on the efficiency of capital spending by determining the weighted cost of funds from each source, with the need to train the authorities responsible for making capital spending decisions in Jordanian pharmaceutical companies.

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9 (Al-Majali, 2011) study aimed to measure the most important factors that have a significant impact on increasing the rates of foreign consultations at the Amman Stock Exchange, through a mathematical model that shows the extent of the impact of the market share price, the real exchange rate, the money supply in a narrow sense, the volume of domestic and foreign spending, on the size of net investment, during the years (1994 - 2009). To achieve this, the study followed the descriptive and analytical approach using statistical methods by analysing Time series, the vector self-regression model and the vector error correction model, and the Diky Fuller test was used to find out whether the study variables were stable with the passage of time. The study concluded that there is a balanced relationship between the variables in the long run, and the study also showed the existence of a positive relationship between students to invest in the shares of the Amman Stock Exchange, for example With the index of the size of net foreign investment and the real exchange rate inside the Amman Stock Exchange, the study indicated that the variables from within the financial market seem to be more countries than the variables outside the market, as the study showed the existence of a clear and significant effect of the variable of the Soviet share price on the size of net foreign investment. Finding a general indicator that reflects the activities carried out by the Amman Stock Exchange, as well as the need for the Central Bank to maintain the spending of the money supply and the permitted cash flow and control the exchange rates of the Jordanian currency, as this is important in addressing many of the imbalances that can occur in the economy.

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10 (Kalbouneh, 2011) a field Study on the Jordanian Industrial Public Joint Stock companies.

Jordanian, by examining the extent of the impact of these systems on some financial performance measures such as return on assets, return on equity and earnings per share, as they are among the most important financial measures of corporate performance, before these companies use the accounting information system and after using it, and the study community consists of all companies. The industrial companies listed in the Amman Financial Market that developed computerized accounting information systems during the period from 2000-2009 according to certain conditions. The number of companies that met the conditions and were included in the study sample reached 24 industrial companies, and the treatment is the theoretical and applied side. The study followed the descriptive analytical approach used Descriptive statistics, and statistical tests such as choosing (T-Test) to analyse the data, and the study concluded that it does not There are statistically significant differences between the averages of the three financial measures used in the study (return on assets, return on equity, return per share) before the date of using the accounting information system and after its use, which indicates that there is no effect of accounting information systems on the financial performance of companies. The results of the study were different from the results of many previous studies. The study recommended the necessity of adopting accounting information systems in industrial companies within the operational activities with the necessity of training the users of these systems.

(Al-Sharqtali, 2010) study denying the analysis of the financial performance of Jordanian companies in terms of the effect of privatization on financial performance according to the type, size, and development of the company. The companies that were privatized in Jordan from 1996 to 2008, when the number reached 21 Jordanian companies. The study sample included eight companies and relied on studying its financial situation three years before privatization and three years after privatization, and to describe the variables of the study, the researcher used to analyse the financial data and calculating the different financial ratios. And the analysis of unilateral variance to analyse the data and verify the correctness of the hypotheses in order to achieve the objectives of the study, and the study concluded that the liquidity ratios before privatization were higher than the liquidity ratios after privatization, and the study also found an evolution in activity ratios and the market after privatization. The results of the study also indicated the existence of Statistically significant discrepancy and difference in the effect of privatization on companies according to the size of the company.

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11 (Francisco Requehat, silvente and Walker, 2007) study aimed to identify the effect of changes in exchange rates of circulated currencies on the profit margins of companies operating in the car market in the United Kingdom, and to identify the direction of the relationship between fluctuations in exchange rates and profit margins, as it aimed To evaluate the optimal pricing policy followed by the companies, and the study population consisted of all companies operating in the auto market in the United Kingdom during the period 1971-2002, and the study followed the descriptive analytical approach to address the theoretical and applied side using statistical methods from regression models to analyse data and verify the correctness of assumptions, The study concluded with a set of results, the most important of which are: The decline in profit margins during the period 1971-2002, and the car market in the Kingdom The United Kingdom moved from being a concentrated market to an oligopoly to a more flexible market, as well as a positive relationship between changes in exchange rates and profit margins for companies operating in the automotive sector in the United Kingdom, where the export margins decreased by 4% and the profit margins of local producers increased to 2%, as it was These producers are the most sensitive to the exchange rate, and the study showed that German manufacturing companies follow a clearer pricing policy than other European companies.

(Halil Fiedlun, 2018) aimed to evaluate the relationships between total agricultural products and the real exchange rate on the one hand, and agricultural exports and imports on the other hand, and the researcher followed the descriptive analytical approach to address the theoretical and applied side using statistical methods, where the joint integration methodology was used by Johansson after making the selection of the strong relationship of the Granger. To analyse the data and verify the correctness of the hypotheses in order to achieve the objectives of the study, the study concluded that the real exchange rate does not have a significant impact in the short term on both agricultural exports and imports in the Turkish economy compared to the positive effect of the real exchange rate changes in the long run, as it appeared after the tenth year Where a direct relationship between the real exchange rate and commodity exports was reached The Turkish economy, and an inverse relationship between the real exchange rate and agricultural imports in the Turkish economy.

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12 (Obeidat, 2010) main objective of this study is to identify the determinants of stock prices.

Several independent variables have been used, which are trading volume and opposes the stock, the distributed wind, the book value, and the financial leverage. And the cash liquidity to express these factors, and the study aimed to test whether these factors help explain the changes occurring in the prices of bank shares and the extent of the impact of each factor in maximizing stock prices and working on interest in them in the future and working to improve performance in it. All the 16 commercial banks operating in Jordan, listed on the Amman Stock Exchange, are commercial banks. A sample consisting of commercial banks was selected during the study period extending from 1992 to 2009, and a descriptive analytical approach was followed to address the theoretical and applied side, and a multiple linear regression model was used for data analysis and verification. From the validity of the hypotheses in order to achieve the main objective of the study, and the study concluded that there is no direct, statistically significant relationship between the price of the shares for commercial banks and the following independent factors: trading volume, cash liquidity, book value, financial leverage and book value. It has also concluded that there is a direct relationship of statistical significance between the share prices of commercial banks on the one hand and the distributed wind and the return on shares on the other hand. The study also showed that the independent variables combined have a significant impact on the dependent variable on the changes occurring in it, and the study recommended the necessity of conducting more studies to include other variables not included in the study such as growth rate, share turnover rate, general index of stock prices and the cost of capital.

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13 (Sulhairshan and Rakesh, 2013) study aimed to identify the relationship between some of the macroeconomic variables and the interest rate. And the exchange rate of the dollar against the Indian rupee) on the one hand and stock returns on the other hand, and the study population was represented by companies in the capital market in India during the period 1992-2011. The study followed the descriptive analytical approach to address the theoretical and applied side using methods. The different statistic, where the Grainger test of the meta-test was applied to determine the direction of causation between the variables in order to analyse the data and verify the validity of the hypotheses in order to achieve the main goal of the study, and the study concluded that there is a relationship between interest rates and the exchange rates of the dollar against the Indian rupee on the one hand and the returns of shares of joint stock companies in India The study showed that its results are useful to investors and decision-makers, as appropriate policies and strategies can be built to reduce the negative effects of the fluctuations in exchange rates and interest rates. The study indicated that historical data on exchange rates and interest rates can be used in the neto in the movements of stock returns.

(Ramin Cooper, Lee How, Molaniacl hatizah, hamzah, 2014) study aimed to identify the nature of the relationship between macroeconomic variables (interest rates, price levels, currency exchange rates, money supply on the one hand, and stock market returns. The study also aimed to identify the nature of the balance relationships between selected macroeconomic variables and the stock market indicators in Singapore In the long term and the extent of the impact of these variables on investment in the stock market, the study population included the finance sector, the real estate sector, the hotel sector, the industry sector, and the rest of the other economic sectors during the period from 1989-2001. The study followed the descriptive and analytical approach to address the theoretical and applied side. Using different statistical methods, where the Grainger test for causality was applied to determine the direction of causality between the variables and the use of the Johansen method of co-integration, to explain the balance of the relationship between the variables in the long term, to analyze the data and validate the hypotheses in order to achieve the objectives of the study. The real estate sector and all the macroeconomic variables in the short and long range, while the macroeconomic variables (interest rates and money supply) had no statistically significant impact on the hotel sector and finance sector stock indices.

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14 (Ostro Cliff & Ogetin Willy, 2014) The aim of this study is to know the effects of macroeconomic factors on the financial performance of industrial companies in Kenya, especially those listed on the Nairobi Stock Exchange, where the study aimed to identify the impact of four main factors (interest rates, inflation, GDP, and currency exchange fluctuations) on performance. Financial, and the study population consisted of all 62 companies listed in the Nairobi Stock Exchange, and a sample consisting of 466 companies was selected during the period from 2003 - 2012, and the study followed the descriptive analytical approach to address the theoretical and applied aspect using different statistical methods of regression models and measures of trend Central and time series data analysis and validation of hypotheses in order to achieve the main objective of the study For a study in analysing data on ATP review pricing theory, Spss and Microsoft Excel, the study concluded that there is a statistically significant relationship between macroeconomic variables (exchange rate, interest rate, inflation rate and financial performance of companies in the construction and industrial sectors, and the study showed that the economic variables Overall, it had a weak impact on the performance of companies in the agricultural and commercial sectors.

(Obeng, 2013) study aimed to show the Econometric analysis of the relationship between GDP growth rate and exchange rate in Ghana. Analysis of the economic relationship between the growth rate of GDP and the exchange rate in Gata. The growth rate of the gross domestic product and the rate of exchange rates in circulation in Ghana during the time period from 1980 to 2012, and the study followed the descriptive analytical approach to address the theoretical and applied side, using statistical methods from regression models to analyse data and verify the correctness of assumptions in order to achieve the main goal of the study, The study concluded that there is a direct, statistically significant relationship between the rate of exchange rate in circulation on the one hand and the rate of growth of the gross domestic product on the other hand, and the study recommended that decision-makers should take the rate of exchange into consideration and work to stabilize the fiscal and monetary policy.

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15 By reviewing the previous studies, we find that there is interest by researchers on the two issues of exchange rates and the financial performance of companies, as previous studies dealt with the issue of exchange rates and their risks and their impact on financial and economic indicators, and these studies were adopted in measuring that impact on methods. It is noticed that these studies differed from each other around the world regarding the results that were reached as a natural result of the different times and place in which they were carried out, in addition to the different nature of the different projects and sectors that were conducted on them, and the current study is similar to previous studies Such as the study of Traders, 2013), (Ba Amara, 2013) (Abu Zuaiter, 2006), (Nawfal et al., 2012) in that it is trying to determine the factors affecting the bank’s profitability. The current study also agreed with previous studies in terms of the approach followed, which is the descriptive approach, noting that the study (Al-Sondos, and Al-Momani, 2012) is the closest to the current study in terms of study variables. The current study is an extension of the previous studies in terms of determining the factors affecting the performance of banks operating in Lebanon. This study examines the effect of exchange rate on financial performance in an environment that witnesses a scarcity of previous studies on the subject. It also contributes to the researchers ’solution to the study of exchange rates and their risks and their impact on the performance and future of banks and on the efficiency of the financial market in Lebanon, as well as analysing the local and foreign currency LBP vs USD within the climate changes. The study showed a level of significance (α ≤ 0.05) on any of the banks' financial performance indicators. Study sample (return on assets, return on equity, return per share, turnover per share, market value of the bank’s share). The results of the study were different from the results of many previous studies.

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2.2 Theoretical Background

This chapter focuses on understanding of theories and concepts relevant to the topic as for dealing in foreign currencies is closely linked to investment and financing operations and suffices in economic and financial aspects, whether at the level of individuals or countries and on all banking and financial activities, which made it of utmost importance, as the intertwining of economic relations and commercial activity between different countries of the world, each of which has a national currency It has led to the existence of the so-called foreign exchange rate, which has become the focus of great interest from all investors and economists. This issue is of interest to all sectors in the countries and even at the level of ordinary individuals. Determining the exchange rate of a honey against foreign currencies depends on the prevailing system or foundations adopted by the state in that, although it is not possible to neglect the forces of demand and supply for the currency, which in turn depends on the demand and supply of goods and services, and the countries sought to achieve an arithmetic balance in the balance of their payments, and for this reason, countries usually resort to devaluing their national currency in relation to foreign currencies in order to increase their exports and reduce their imports (Hassan, Tawfiq Abdel Rahim, 2010). The researchers have attached great importance to defining a comprehensive concept of the exchange rate, which has been translated in the presence of many attempts represented in the multiplicity of theories and concepts.

Crystallization is a real concept that contributes to diagnosing reality and establishes new theories on the subject, explaining the various changes in the economy and economic crises, and trying to understand the phenomenon characterized by the intertwining of the most important factors.

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2.2.1 Affecting exchange rates

The world has known several exchange systems, such as the fixed exchange rate system, and the free or floating exchange rate system. The goal of all these systems was to maintain the stability of the exchange rate and to develop and prosper in international exchanges and trade. The theories have gone beyond the diversity of international monetary systems and have taken different measures. The traditional theories refer to determining the exchange rate to the difference in inflation, interest rates, and the status of the balance of payments, but recently there are other factors such as flags and political and economic expectations that can affect one way or another in determining exchange rates Shebani, (2009).

2.2.1.1 The Concept of the Exchange Rate

Money is everything that accepts a general vault and is used as a measure of values, as a medium of exchange and as a store of value, and this definition applies to countries or monetary regions that deal in a single legal currency where payments are made from the debtor to the creditor in public money or banknotes, but when dealing among countries, we find that this mechanism stops working, and there must be a system that converts the national currency into other currencies, and thus the problem of calculating the exchange value and then the problem of paying you the value or in other words the problem of money on the basis of which it is calculated and the money with which it is paid, as the establishment of trade Between countries using their national currency, the consequence of a new economic factor is the exchange rate Al-Ghalaby, 2010 ( p. 21, p. 22).

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18 The exchange rate is the price of one currency in another currency or the ratio of the exchange of two currencies, one of the two currencies is considered a commodity and the other currency is considered a price for it, and it is also known as the rate at which the family of a country is exchanged for the rest of the currencies of the world Abu Khari (2010, p. 120). The limitation of the previous definitions to an intermediate term of exchange and the measure of value, which are the two basic functions of money. The researcher believes that it is not possible to agree on a unified definition of the exchange rate, and the researcher believes that it is the number of monetary units of the local currency that equals one unit of foreign currency or vice versa, meaning that when monetary units of the local currency must be paid to obtain one unit of foreign currency, i.e. Of local currency, denominated in units of foreign currency, and this price is determined based on supply and demand in the currency market.

2.2.1.2 Types of Exchange Rates 2.2.1.2.1 The real exchange rates

Real indicators are often considered appropriate indicators of the equilibrium exchange rates or the international competitiveness, and the real exchange rate is defined as the ratio of the global price level of traded goods to local prices measured in a common currency, and the real exchange rate is linked between the price indices and the nominal exchange rate according to the following formula:

Re – Pd / epf.

Re = Real Exchange rate E = Nominal exchange rate

Pd,pf = The index of domestic and foreign prices, respectively.

From the previous formula, it becomes clear that there is an inverse relationship between the real exchange rate and the nominal exchange rate, as well as between it and the index of foreign prices, as well as the existence of a direct relationship between the real exchange rate and the index of domestic prices, Al-Ghalabi (2010, p. 21).

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19 Menzie D, Chinn (2006) believes that the real exchange rate is the fair nominal exchange rate based on the general level of prices and defines it as the number of units of hedging currency required to purchase one unit of foreign currency, and thus it measures competitiveness.

Qi (2003) defines the real exchange rate between the two currencies of the two countries as the relative purchasing power of these two currencies, where the purchasing power of a currency is equal to the reciprocal of the price level in the country of this currency.

In general, the second real exchange rate between the two currencies of the two countries I & J is written as follows:

where:

is the real exchange rate

is the nominal exchange rate

is the country price index J

is the country price index I

2.2.1.2.2 Nominal Exchange Rate

The nominal exchange rate is defined as the price of a foreign currency in terms of local currency units, and this definition can reflect the local currency in terms of foreign currency units, that is, the current currency price, which does not take into account its purchasing power in goods and services between the two countries. When using the first definition, the price of the foreign currency is expressed in terms of local prices and denoted by E, for example in the case of the dollar and the Jordanian dinar symbolizes the number of units of the dollar against Dinar by JD / $ (dollars of one dinar includes the conversion of dinar dollars by dividing by E and vice versa by multiplying by E.

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20 The nominal exchange rate changes daily by rise or fall (Al-Abbas, 2003). That it is a measure of the value of the currency of one country that can be exchanged for the value of another country, and currencies are exchanged or the operations of buying and selling currencies according to the rates of these currencies between each other, and the nominal exchange rate for a currency is determined according to the demand and supply on the exchange market at some point in time. Therefore, the exchange rate can change according to the change in demand and supply due to the exchange system adopted in the country, so the rise in the price of one currency indicates the other privilege.

2.2.1.2.3 The Real Effective Exchange Rate

The reality is that the actual exchange rate is a nominal rate because it is an average of several bilateral exchange rates. In order for this indicator to have an appropriate indication of the country's competitiveness towards the outside, this rate must be subject to correction by removing the effect of relative price changes taking into account the difference between the inflation rate of a country and the weighted average of foreign inflation rates. (Quday, 2003, p.

- 106-30). (Ali and Samir, 2012) believe that this indicator plays as a nominal actual exchange rate weighted by the relative rates between the country. The concerned and its most important trading partners, and the exponential effective exchange rate is the evolution of the country's exchange rate in consideration against the currencies of the most important trading partners of this country. After entering the index of relative prices to be a true indicator of the international competitiveness of the country concerned.

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21 2.2.1.2.4 The Nominal Effective Exchange Rate

This indicator gives an answer to the specific question: What are the effects of exchange rate movements on the value of a selected commodity in comparison with a period In specific terms?

this indicator also gives a clear indication of the additional value of the country's receipts in its local currency from commodity exports for the current period compared to the value of its proceeds for the base period, and one of the most important developments in the nominal exchange rate is the multiple exchange rate model, which is a nominal indicator used to calculate the effective exchange rate change . A specific industrial, defined as the change in the exchange rate that results in the same change in the trade balance of a particular country expressed in the equivalent currency, and this indicator shows in the medium term the net effect of changes in the exchange rate of a particular country on its trade balance (Al-Ghalabi, 2010, pp. 29-30).

2.2.1.2.5 Equilibrium Exchange Rate

Follows the purchasing power parity law, which assumes that the equilibrium exchange rate is a fixed number that is determined by choosing a specific base year in which the country has an external equilibrium that usually includes an equilibrium or a wave value of the current account, or often involves a surplus in the balance of payments. Therefore, the value of the real exchange rate in this year is the equilibrium real exchange rate for this country, and any rise from this value after an appreciation of the currency higher than its real value (Al-Sadiq et al., 2003, p.

166).

2.2.1.2.6 The Cash or (Spot) Exchange Rate:

The exchange process is considered in cash if the delivery and receipt of currencies takes place immediately after the conclusion of the exchange contract, applying the exchange rate at the moment of the conclusion of the contract, and in reality the period of cash exchange may extend to 48 hours after the conclusion of the contract. It should be noted here that the exchange rate changes constantly during the day according to the market supply and demand factors, and the exchange agents inform their customers of these prices and work to implement their orders regarding conducting exchange operations (Tariq, 2009).

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22 2.2.1.2.7 The forward Exchange Rates:

The currency market allows businesses to close the exchange rate, and it is called the forward rate, according to which the currency will be bought or sold in the future, and that the first contract with an amount of a certain currency will be bought or sold by the business in a moment. Commercial banks provide their services to businesses that want futures contracts and business establishments in general use the term market to hedge future extensions that they expect to be located or received in foreign currency, and the liquidity of the term market varies between Asalat Al-Nuaimi (2012, p.95)

2.2.1.3 Theories Explaining Prices Exchange 2.2.1.3.1 The Theory of Purchasing Power Parity

Cuts the issue of purchasing power parity under the umbrella of modern literature on the balance of payments and determining the exchange rate. The theory of purchasing power parity is attributed to the Swedish economist Gustav Cassel in 1920 AD, in order to determine how much European countries should change the value of their currencies and their prices To combat inflation prevailing after the First World War, this theory is a mixture of the works of nineteenth-century economists (Ricardo wheathly thornton), and the general formulation of the purchasing power parity principle states that you should be able to buy the same commodity in any country for the same amount of currency Halora, Real McDak, Hosni translation (2007, p.

211)

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• This theory is based on a group of assumptions that can be included in the following:

- It is assumed that there is freedom of foreign exchange between two countries, whereby the exchange rate between them becomes dependent on what goods and services the currency of each of them can fragment inside the country

- We also implement Cassel's idea that the parity price between two currencies unites when the purchasing power equals the currency of each country in its internal market with its purchasing power in another country, and this is after the transfer of the relevant currency to the general public of the other country according to the prevailing exchange rate achieved for the exchange.

- The theory assumes that in the event that the economy of a country suffers from inflation and the purchasing power of its money decreases, the value of the second country will also be reduced by the same proportionality, and the thing will be done if the prices rise.

•

Absolute theoretical purchasing power parity formula:

According to this picture, the exchange rate of the currency is denominated in units of another currency, depending on the purchasing power of the two currencies, all done in fools and from it the exchange rate is determined by finding the ratio between price indicators and price index numbers - in different countries.

The price indicators are in my two currencies. The exchange rate can be expressed in the domestic and foreign price indices through the following equation: Exchange rate = domestic price index | Foreign price index This equation leads to another result, which is the unification of the prices of goods and services in various countries, meaning that the domestic price level equals the product of the foreign currency price in local currency and the foreign price level, and the equation is as follows: Domestic price index = exchange rate and foreign price index (Muhammad , 2003).

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•

The relative formula of the purchasing power parity theory:

In contrast to the absolute formula of the purchasing power parity theory, the relative formula remained on the following loans: taking into account transportation costs, freedom of information transmission, and removing trade barriers that limit price parity, expressed in both local and foreign currencies. The relative formula is concerned with determining the equilibrium exchange rate through the inclusion of the inflation index, as the nominal exchange rate eliminates the inflation rates in the two countries. According to the theory, the exchange rate balance is achieved when the rate of change in the exchange rate equals the rate of change in the price level.

It can be expressed by the following equation:

Δ log Et = Δ log Pt – Δ log Pt *

Where:

Δlog Et is the relative change in the nominal exchange rate

Δlog Pt – Δlog Pt *: expresses the difference between domestic & foreign price levels

From the previous equation that the decrease in the nominal exchange rate is equal to the difference in the level of inflation between the country under study and the foreign item.

Therefore, this trend is based on the principle that countries with high inflation rates compared to the countries dealing with them accept the deterioration of the value of their currency in exchange for currencies. This country, which affects its trade exchanges (Ali, 2013).

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25 Criticisms directed at the theory of purchasing power parity:

1. The assumption of the theory about the stability of prices and the stability of levels of foreign trade at a certain time becomes impossible, especially in inflation (Aisha, 2014)

2. There are elements that affect the trade balance other than the general level of prices, especially the elasticity of demand with respect to income and prices, as well as the elasticity of exports and imports with respect to income and, for example, prices (Khader, 2012).

3. The difficulty of determining the period of equilibrium of exchange rates in the relative form of the theory, including the difficulty of choosing the base period in which the exchange rate is taken in comparison with subsequent changes in it (Muhammad, 2003).

The exchange rate can be affected by these transfers, and it is clear from what was presented (Muhammad, 2003) that the purchasing power parity theory is nothing but a mathematical expression that clarifies the relationship between the prices of a single commodity and the exchange rates of currencies, and the researcher agrees with what he presented (Khader, 2012) as the theory of Purchasing power parity focused on many monetary factors in explaining the exchange rate, while ignoring other factors that might have a greater impact, such as the elasticity of demand for income and for prices, as well as the elasticity of exports and imports with respect to income and for prices.

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26 2.2.1.3.2 The Theory of Interest Rate Parity

He formulated this theory by Keynes. In his book in 1923, he envisioned the goal that capital movements play in determining the exchange rate, as it implicates changes in the exchange rate with changes in interest rates found in various official currencies (Soumaya, 2010). On interest rates in the interpretation of changes that occur at the level of the external value of the currency, as well as the difference in the interest rates of the two countries, which equals or reflects the rate of deterioration or improvement in the currency towards the opposite or the other currency, as an increase in the discount rate in a country would pay a price interest to increase, which leads to activating the movement of capital towards this country for the purpose of investment, given that the interest rate applied is higher than in other countries, which leads to an increase in foreign demand for the local currency, including a rise in the exchange rate, and the opposite happens when the discount rate decreases, as In turn, it leads to a decrease in the domestic interest rate, and an increase in the supply of the national currency and the exit of capital in search of a higher interest rate, thus reducing the external value of the local currency and this is reflected in the balance of payments. In other words, the interest rate parity theory indicates that the rate of delay in receipt and the rate of delay in delivery of a foreign currency should reflect the interest rate differences between the two countries in the sense that the forward exchange rates of foreign currencies change and are adjusted on the basis of equivalent interest rates (Sheibani, 2009).

- The theory of interest rate parity is based on a set of the following assumptions:

1. Borrowing in the absence of swap costs.

2. Assumption of full movement of capital (there is no monitoring of the movement of capital, and this theory assumes that there is no distortion of the market characteristic that it is complete.

3. Assumption of substitution of capital as the concerned domestic and foreign assets are similar in terms of degree of risk and maturity date (JPAllegrot, 1997).

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27 The researcher agrees with what was presented by (Sheibani, 2009), as any change in the interest rates prevailing in two countries after a certain period of time extends the effect of this change to the exchange rates of these two countries ’currencies. Explains the relationships existing in the local and foreign currency exchange market.

2.2.1.3.3 In the Theory of Balances

This theory is based on the basis that the exchange rate of a country's currency, especially those that follow the flexible exchange system, is determined according to the state of the balance of payments, so if the balance of its benefits achieves a deficit, meaning a cash balance, this indicates an increase in the offered quantities of the local currency, which will result in a decrease in its external value and the opposite occurs when the balance of payments achieves a surplus. Some infer the validity of this theory from Germany's experience with the battles during the First World War, so that despite the significant increase in the amount of money in circulation, the speed of its circulation and its rise, the German currency was not affected and its external value did not know the decline, and the reason for this is the equalization of the two sides of the balance of payments (Quday, 2003, p. 123).

2.2.1.3.4 Quantitative Theory

The main content of the quantitative theory is that an increase in the quantity of money leads to a rise in prices at home, which leads to a decrease in the demand for domestic goods and thus a decrease in exports and an increase in imports because the price of foreign goods becomes lower compared to the prices of domestic goods after the increase in their prices, This leads to an increase in the demand for foreign currencies in order to pay the values of imports, and a decrease in the demand for local currencies, to repay the values of exports.

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28 (Dombusch and Fischer, 1980) argue that if the amount of money supplied decreases and the speed of its circulation decreases, then the opposite occurs, i.e., the costs of exports decrease, which leads to their rise and the costs of imports rise, which leads to their decrease, including an increase in the demand for local goods and services, which leads to an increase in the demand for the local currency. Thus, the external value of the local currency will rise. And (Muhammad, 2003) believes that excessive increases in the money supply result in high levels of inflation, which are reflected in the balance of payments, leaving different conditions, which requires a change in the exchange rate in line with the general level of the new prices.

2.2.1.4 Factors Affecting Exchange Rates

Looking at economic and political events, we find that there are many factors and determinants that affect the rise and fall of demand and supply for currencies in the market, which in turn leads to an impact on their exchange rates, up and down, and therefore these factors can be classified into two parts, namely: economic factors affecting the exchange rate, and non- economic factors affecting the exchange rate.

2.2.1.4.1 Economic Factors Affecting the Exchange Rate

1. The quantity of money:

Friedman believes in his famous article (money supply, price changes and output) that price movements mainly reflect important changes in the quantity of money, and that there is a relationship. A document between changes in the quantity of money per unit of output and price movements, and Friedman says that there is no case in which there has been a fundamental change.

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29 In the amount of money in terms of a unit of output without being accompanied by significant changes in the price level, the trend splits and vice versa, and to the best of my knowledge there is no tremor in which important shifts occurred in the price level but accompanied by a fundamental change in the amount of money and one unit of output in the same direction. Until what explains the correctness of the relationship between the quantity of money per unit of output and price experiences is the existence of two factors:

a. Production changes, which are considered an independent variable. If the quantity of money is fixed and the volume of production doubles. Prices will tend to fall by roughly half, and the explanation for this is the decrease in the quantity of money in proportion

b. Per unit of output Changes in the amount of money that individuals want to keep in relation to their entitlement.

Friedman believes that there is a need for proportionality between the growth rate of the total amount of money and the rate of growth of production and the population to maintain stability in price stability. From the above it is clear that excessive money issuance and an increase in the amount of money lead to an increase in the price level. Thus, making the goods of the concerned state less able to compete with the goods of other countries, which causes an increase in imports and a decrease in exports.

2.2.1.4.2 Interest Rates

Interest rates affect the exchange rates indirectly, as interest rates decrease with the availability of investment opportunities, which leads to an increase in the demand for capital for the purpose of investment, which stimulates the national economy and leads to an improvement in the value of the national currency towards other currencies. If interest rates rise, the investor’s tendency to borrow weakens, and this results in a decrease in economic growth, and this is reflected in the value of the national currency towards other currencies (Adhaat, 2011).