Effect of Basel III Liquidity Ratio LCR and NSFR on the Profitability of Commercial Banks in Bangladesh

Subrata Deb Nath, Munna Rani Biswas and Md. Abdul Maleque M.M Mohitur Islam

International Journal of Economics & Business Administration (IJEBA), 2024, vol. XII, issue 3, 12-28

Abstract: Purpose: Commercial banks play a crucial role in the sustainable economic development of any economy. They are dominating the banking sector of Bangladesh. Recently Commercial banks are facing a severe liquidity crisis, in spite of maintaining LCR and NSFR above the lowest supervisory regulation. Therefore, the aim of this research is to determine the effect of Basel III liquidity ratio LCR and NSFR on the profitability of commercial banks in Bangladesh. Design/Methodology/Approach: This study alphabetically selects 14 commercial banks as sample for secondary panel data for 9 years’ time span (2015-2023) and uses ROE, ROA as dependent variables and LCR, NSFR, NPL as independent variables for random effects regression analysis. Moreover, at the very beginning, panel unit root test is conducted to verify the stationary property of all study variables and then performed Hausman specification test to select appropriate regression model. Findings: Study results show that LCR has statistically significant negative effect whereas NSFR has positive impact on the profitability state owned commercial banks in Bangladesh, i.e. if LCR increases in 1 unit, it decreases profitability by 0.067 unit, whereas if NSFR increases in 1 unit, it raises profitability by 0.5141 unit. Moreover, study also shows strong negative influence of NPL on the profitability of commercial banks. Practical Implications: Management of respective banks, regulators like central bank, ministry of finance etc., academic researchers, journalists and other stake holders may utilize the outcome of this research for proper liquidity management, future research reference regarding liquidity management. Originality value: Research study regarding the impact or effect of Basel III liquidity ratio on the profitability of commercial banks is hardly available in the context of Bangladesh. Hence, this is a pioneering effort to examine the effect of Basel III liquidity ratio LCR and NSFR on the profitability of commercial banks in Bangladesh.

Keywords: Basel III liquidity ratio; LCR; NSFR; profitability; SOCB. (search for similar items in EconPapers)
JEL-codes: E44 E58 G21 G28 L25 (search for similar items in EconPapers)
Date: 2024
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