What Drives Bank Profitability? A Panel Data Analysis of Commercial Banks in Bangladesh

Rana-Al-Mosharrafa and Md. Shahidul Islam
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Rana-Al-Mosharrafa: Department of Business Administration, Prime University, 114, 116 Mazar Road, Dhaka-1216, Bangladesh
Md. Shahidul Islam: Department of Banking and Insurance, University of Dhaka, Dhaka-1000, Bangladesh

International Journal of Finance & Banking Studies, 2021, vol. 10, issue 2, 96-110

Abstract: Bank profitability plays a significant role in the growth and development of an emerging economy. The purpose of the study was to examine the impact of bank characteristics, industry concentration and macroeconomics variables on commercial bank profitability in Bangladesh from 2007-2017. Bank profitability is proxied by return on assets (ROA), return on equity (ROE) and net interest margin (NIM). The study is based on secondary data and Hausman test has been performed using STATA softwarein favor of fixed effect modeling. Panel regressions shows that cost efficiency has significant negative impact on ROA and NIM. The positive impact of loan to deposit ratio with ROA suggests that efficient fund management including investment and assessedexpenditure should be emphasized. Bank size has significant negative impact on all the measures of profitability, which indicates that monopolistic competition will reduce banking profit. Credit risk has significant positive impacts on ROE. Industry concentration measured by CR3 is positively related with ROE and has significant negative relation with bank profitability (ROA). Among macroeconomic variables inflation has significant positive and bank spread has significant negative impact on ROE. The coefficients of all the macroeconomic variables have been found to be significantly related to bank profitability while measured by NIM. Our study recommends further research with other explanatory variables such as, corporate governance, corporate social responsibility (CSR) and deposit insurance to accelerate the model and construct the econometric model by using structural equation modeling, mediation effect modeling etc.

Keywords: Profitability; Cost efficiency; Capital adequacy; Bank spread; Commercial bank (search for similar items in EconPapers)
Date: 2021
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