The Impact of Credit Risk and Bank-Specific Variables on Financial Performance of the Listed Commercial Banks in Bangladesh

Dr. Md. Jamil Sharif, Mohammed Ashiqur Rahaman and Dr. Mohammad Moniruzzaman
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Dr. Md. Jamil Sharif: University of Dhaka, Bangladesh
Mohammed Ashiqur Rahaman: University of Dhaka, Bangladesh
Dr. Mohammad Moniruzzaman: University of Dhaka, Bangladesh

International Journal of Research and Innovation in Social Science, 2024, vol. 8, issue 8, 3826-3839

Abstract: The research aims to empirically investigate the impact of credit risk management and bank-specific variables on the financial performance of the listed commercial banks in Bangladesh. This examination is based on secondary data from 28 listed commercial banks for six years starting from 2017 to 2021. Therefore, a dataset of 140 firm-year observations was used in this study. The random effect model has been used to examine the impact of two credit risk variables namely, ‘non-performing loan (NPL)’ and ‘capital adequacy ratio (CAR)’ including three bank-specific variables namely, ‘cost-effective ratio (CER)’, ‘average lending interest rate (ALR)’ and ‘liquidity ratio (LR)’ on financial performance which is measured using ‘return on assets (ROA)’ and ‘return on equity (ROE)’. The study finds that the credit risk variable NPL is negatively related, and CAR is positively related to both of the dependent variables, i.e. ROA and ROE. Among the bank-specific variables, CER and LR have a negative relationship, while ALR has a positive relationship with both of the profitability measurements. This study extends the existing understanding of credit risk and the bank specific variables and their correlation with financial performance. This study also provides valuable insight for banks and management to set their long-term financial goals. Legislators and the central bank can also benefit from this study in making new lending and credit risk policies. The study only included listed commercial banks in Bangladesh, however, this approach can also be used for non-listed, state-owned, and specialized banks. Future researchers can add these financial institutions and extend their inquiry. Other internal and macroeconomic factors that can affect bank financial performance may also be included in future studies.

Date: 2024
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