You are on page 1of 11

International Journal of Banking and Financial Law IJBFL

Vol. 1(1), pp. 001-011, June, 2017. ISSN: XXXX-XXXX

Research Article

Determinants of Profitability of Commercial Banks in

Md. Asadul Islam1, Md. Nazirul Islam Sarker2, Mahabub Rahman3, Arifin Sultana4, AZM
Shafiullah Prodhan5
1Department of Finance and Banking, Jahangirnagar University, Bangladesh.
2Schoolof Public Administration, Sichuan University, China.
3Department of Statistics, Jahangirnagar University, Bangladesh.
4Department of Psychology, National University, Bangladesh.
5Department of Horticulture, Bangabandhu Sheikh Mujibur Rahman Agricultural University, Gazipur, Bangladesh.

The paper examined the profitability determinants of private commercial banks of

Bangladesh for the year 2014 and 2015. The study employed annual data for all the 11
private commercial banks of Bangladesh for the year 2014 and 2015. Multiple regression
analyses were run to capture the significant determinants of profitability and to test
hypothesis. The empirical findings from this study suggested that asset size and Net
Interest Margin ratio had no significant effect on the profitability. But the impact of non-
performing loans to total loans (NPL) on profitability was observed as the most significant
among various variables. Furthermore, investment activities, mainly in shares and
debentures of private sectors also have some positive impact on return on equity (ROE).
The findings also suggested that diversified banking activities including the investment
activities made these banks more profitable. Diversified banking activities are welcomed
but if these activities include higher proportion of volatile trading activity rather than low
risk income streams like fees and commission, the risk may become higher. The policy
direction should be directed in such a way which will enhance the resilience and efficiency
of the financial institutions with the aim of intensifying the sturdiness as well as strength
of the banking sector.

Keywords: Determinant, profitability, performance analysis, Bank, Bangladesh.


The private commercial banks are the major parts of development and prosperity comes from the well-rounded
banking sector in terms of market share and profitability developed and perfect banking system. Strong banking
in Bangladesh with high profit growth. Current system plays important role in efficient allocation and
Commercial banking is the main character of present utilization of credit (Haque and Tariq, 2012). Bank is a
economy as it makes flow of the resource. Finance is backbone of all the industries, because every transaction
blood of the trade, commerce and they play the role of where money is involved, the bank is the main pillar of
vanes in the Circulation of the funds in economy and the funding.
primary growth of any country depends upon the robust
banking system. Commercial banks are the main pillar of
the financial system in Bangladesh as banks provide *Corresponding Author: Md. Nazirul Islam Sarker,
different opportunity and services to clients. The Interdisciplinary Center for Food Security, Bangladesh
importance of the banking sectors is immense in the Agricultural University, Mymensingh, Bangladesh. Email
progress and richness of any state. The economic
Determinants of Profitability of Commercial Banks in Bangladesh
Islam et al. 002

Banks attract saving from people. The main role of a mostly, as credits were given out without commercial
financial system is not only to transfer funds from savers viability, and because it took a long time to call a loan
to investors but also to ensure that funds are being non-performing, and when it was called so, recovery was
transferred to the sectors which are most important for an so abjectly expensive under the erstwhile laws, the loan
economy. Economies that have a profitable banking recovery rate was also extremely poor. To set up a
sector are better able to withstand negative shocks and proper regulatory system that would diagnose such
contribute to the stability of the financial system problems and correct them was also tough while the
(Athanasoglou, Brissimis and Delis, 2005). On the other government intervention was in existence everywhere.
hand, banks insolvencies can result in systemic crisis. Therefore, banking concept like profitability, liquidity and
Therefore, it is important to understand the factors which capital adequacy were alien to bank managers.
really affect the banking sectors profitability. The There were no domestic private commercial banks in
Financial sector of Bangladesh, like most in developing operation until 1982; When the Arab-Bangladesh Bank
countries, is dominated by banking industry. After the Ltd. (currently AB bank Ltd.) started its business as
independence of Bangladesh in 1971, all the domestic private commercial bank in the country. To adopt with
banks were merged and grouped into few state owned more market based system as well as to increase
commercial banks. The aim of the government was to competition, in early 1980 the government encouraged
channel funds to the public sector and to prioritize credit some private banks to flourish in the country.
to those sectors that sought to reconstruct the war- Accordingly, licenses were given to six new private banks
affected country mainly industries and agricultural to operate in the country till 1983. With the good
sectors. However, their performance was not satisfactory performance of the new private banks and keeping in
in terms of profitability, customer service and overall view the poor performance of nationalized commercial
performance. To set up a proper regulatory system that banks government privatized two state owned banks
would diagnose such problems and correct them was namely the Uttara Bank and the Pubali Bank during
also tough while the government intervention was in 1984-85. Another state owned bank, The Rupali Bank
existence everywhere. Therefore, banking concept like Limited has also been transferred to the private sector in
profitability, liquidity and capital adequacy were alien to 1986. More commercial banks were permitted to operate
bank managers. Some private banks were allowed to in the private sector during the mid-1990s.
operate in the market in 1980s, they begun to perform The number of banks in all now stands at 53 in
satisfactorily. Later more private commercial banks were Bangladesh. Out of the 53 banks, 4 are Nationalized
allowed to play in the market. At present private Commercial Banks (NCBs), 28 local private commercial
commercial banks are dominant in respect of market banks, 12 foreign banks, 5 are Development Financial
share and profitability in the banking sector of Institutions (DFIs) and the rest of 4 are other bank among
Bangladesh. them Sonali Bank is the largest among the NCBs while
Pubali is leading in the private ones. Among the 12
Banking Sector in Bangladesh foreign banks, Standard Chartered has become the
largest in the country. Besides the scheduled banks,
After the independence of Bangladesh, the Government Samabai (Cooperative) Bank, Ansar-VDP Bank,
of Bangladesh declared the Dhaka branch of the State Karmasansthan (Employment) Bank and Grameen bank
Bank of Pakistan as the central bank of the country, and are functioning in the financial sector. The main objective
it was renamed as Bangladesh Bank. This was done of the study is to identify the major determinants of the
through the Presidential Order No. 127of 1972 and the profitability of Private Commercial Banks in Bangladesh
Bangladesh Bank came into existence with retrospective in recent years.
effect from 16 December 1971. The Bangladesh
government decided to nationalize all banks except
foreign banks and renamed the various banks in 1972. All LITERATURE REVIEW
the domestic banks were merged and grouped into six
commercial banks. The aim of the government was to This study examines some of the theories relating to
channel funds to the public sector and to prioritize credit capital and profitability as well as bank size and
to those sectors that sought to reconstruct the war- profitability. The theories include the signaling theory,
affected country mainly industries and agricultural expected Bankruptcy cost hypothesis, risk-return
sectors. However, these banks were unable to function hypothesis, market power and efficiency Structure
well because of the government control at the wrong hypothesis.
sectors. The situation was worsened by the fact that The relationship between capital and profitability is
loans were provided to the public sector without taking explained by signaling theory (Berger, 1995; Trujillo-
account of the commercial viability. At that period banks Ponce, 2012), expected bankruptcy cost hypothesis and
had poor capital lease, poor customer services and risk-return hypothesis (Athanasoglou, Brissimis and
lacked any market-based monetary instruments. But Delis, 2005; Olweny and Shipho, 2011). The signaling
Determinants of Profitability of Commercial Banks in Bangladesh
Int. J. Bank. Finan. Law 003

hypothesis suggested that a higher capital was a positive in the anticipated way. Saona (2011) examined the
signal to the market of the value of a bank (Ommeren, determinants of the profitability of the US banks during
2011). As Berger (1995) and Trujillo-Ponce (2012) the period 1995-2007. The empirical analysis was
observed that, under the signaling theory, bank combined bank specific (endogenous) and
management signaled private information that the future macroeconomic (exogenous) variables through the GMM
prospects are good by increasing capital. Thus, a lower system estimator. He found a negative link between the
leverage indicates that banks perform better than their capital ratio and the profitability, which supports the
competitors who cannot raise their equity without further notion that banks were operating over-cautiously and
deteriorating the profitability (Ommeren, 2011). On the ignoring potentially profitable trading opportunities. Scott
other hand, bankruptcy hypothesis argued that in a case and Arias (2011) also investigated the primary
where bankruptcy costs were unexpectedly high, a bank determinants of profitability of the top five bank holding
holds more equity to avoid period of distress (Berger, companies in the United States. Profitability determinants
1995). As the literature review pointed out, the signaling for the banking industry include capital to asset ratio,
hypothesis and bankruptcy cost hypothesis supported a annual percentage changes in the external per capita
positive relationship between capital and profitability. income and internal factor of size (as measured by an
However, the risk-return hypothesis suggested that organizations total assets). Staikouras and Wood (2004)
increasing risks, by increasing leverage of the firm, leads constructed the OLS and fixed effect models to examine
to higher expected returns. Therefore, if a bank expects the determinants of European bank profitability from 1994
increased returns (profitability) and takes up more risks, to 1998. The profitability of European banks is influenced
by increasing leverage, the equity to asset ratio not only by factors related to their management decisions
(represented by capital) will be reduced. Thus, risk-return but also to changes in the external macroeconomic
hypothesis predicts a negative relationship between environment.
capital and profitability (Dietrich and Wanzenrid, 2009; Khrawish (2011) accessed the Jordanian commercial
Ommeren, 2011; Saona, 2011; Sharma and Gounder, bank profitability from 2000 through 2010, and
2012). categorized the factors affecting profitability into internal
Consequently, the Market Power (MP) and Efficiency and external factors. The author found that there was
Structure (ES) theories explained the relationship significant and positive relationship between return on
between the bank size and profitability. Olweny and asset (ROA) and the bank size, total liabilities/ total
Shipho (2011) observed that the market power posits that assets, total equity/ total assets, net interest margin and
performance of banks was influenced by the market exchange rate of the commercial banks and that there
structure of the industry and that the Efficiency Structure was significant and negative relationship between ROA of
(ES) hypothesis maintains that banks earn high profits the commercial banks and annual growth rate for gross
because they were more efficient than the others. domestic product and inflation rate. Dietrich and
Concluding on the MP and ES theories, Olweny and Wanzenrid (2009) analyzed the profitability of commercial
Shipho (2011) argued that MP theory assumed that the banks in Switzerland over the period 1999 to 2006. Their
profitability of a bank is a function of external market findings revealed that the most important factors are the
factors, while the ES assume that bank profitability is GDP growth variable, which affects the bank profitability
influenced by internal efficiencies. positively, and the effective tax rate and the market
The empirical review of the study was done by identifying concentration rate, which both had a significantly
similarities and differences across the various economies negative impact on bank profitability. The bank specific
studied by previous researchers. The factors affecting and macroeconomic determinants of profitability in
banks profitability have been empirically examined by participation banks for Turkish banking sector using ROA
many authors, especially in the developed countries. and ROE. The bank specific determinants of profitability,
Demirg-Kunt and Huizinga (1999), using bank level the ratio of non-performing loans to total loans had a
data for 80 countries in the 1988-1995 periods, showed significant negative effect on profitability. The result was
that differences in interest margins and banks profitability consistent with the study by Davydenko (2010) in the
reflect a variety of determinants: the characteristics of the Ukraine. Flamini, McDonald and Schumacher (2009)
bank, macroeconomic conditions, explicit and implicit investigated the determinants of bank profitability in 41
bank taxation, deposit insurance regulation, overall Sub-Saharan African (SSA) countries, using a sample of
financial structure, and several underlying legal and 389 banks. The study proved that apart from credit risk,
institutional indicators. Athanasoglou et al. (2005) studied higher returns on assets were associated with larger
the effect of bank-specific, industry-specific and bank size, activity diversification, and private ownership.
macroeconomic determinants of bank profitability, using The results also indicated that bank returns were affected
an empirical framework that incorporates the traditional by macroeconomic variables, suggesting that
Structure-Conduct-Performance (SCP) hypothesis. The macroeconomic policies that promote low inflation and
results indicated that all bank-specific determinants, with stable output growth do boost credit expansion. Sharma
the exception of size, affect bank profitability significantly and Gounder (2012) investigated the profitability
Determinants of Profitability of Commercial Banks in Bangladesh
Islam et al. 004

determinants of deposittaking institutions in Fiji, over the market size and bank's return on equity. It seemed that
20002010 periods. The study used panel data capital adequacy was an important factor for a bank to be
techniques of fixed effects estimation and generalized profitable.
method of moments (GMM). The authors discovered that The above literature showed the consistency of some of
market power (measured by the Lerner Index) was a key the internal (bank-specific) factors like capital, size and
determinant of profitability. Thus, institutions were credit risks in determining bank profitability across
allowed to pass on to their clients the interest costs of different economies of the world. The external
raising deposit liabilities and the overall cost of (macroeconomic) factors of gross domestic product
operations. Naceur and Goaied (2008) observed a growth rate and interest rate had also been prominent in
positive relationship between capital and net interest the determination of bank profitability. Consequently, the
margin or profitability in Tunisia, but determined that the review showed that return on assets (ROA) and return on
bank size impacts negatively on profitability, which equity (ROE) were the most common criteria employed
implied that Tunisia banks are operating above their as measures of profitability by most researchers.
optimal level. Olweny and Shipho (2011) evaluated the In principle, ROA reflects the ability of a banks
effects of banking sectoral-factors on the profitability of management to generate profits from the banks assets,
commercial banks in Kenya, using panel data from 2002 although it may be misleading due to off-balance-sheet
to 2008 of 38 commercial banks. The authors concluded activities. Thus, Return on Asset (ROA) is primarily an
that the bank-specific factors were more significant indicator of managerial efficiency. Return on Equity
factors influencing the profitability of commercial banks in (ROE) indicates the return to shareholders on their
Kenya than market factors. The study revealed that equity. Thus, it is a measure of the rate of return flowing
profitable commercial banks were those that strive to to shareholders. As such it approximates the net benefit
improve their capital bases, reduce operational costs, that the shareholders received from investing their capital
improves assets quality by reducing the rate of non- in the financial institution. Moreover, ROE equals ROA
performing loans, employs revenue diversification times the total assets-to-equity ratio. The latter is often
strategies as opposed to focused strategies and kept the referred to as the banks equity multiplier and measures
right amount of liquid assets. Aburime (2008) investigated financial leverage. Essentially the ROE ROA
the determinants of bank profitability in Nigeria, using a relationship clearly illustrates the fundamental trade-off
panel data from 1980-2006. He found that real interest banks face between risk and return, whereas the equity
rates, monetary policy, and exchange rate regime were multiplier reflects the leverage or financing policies, i.e.
significant macroeconomic determinants of bank the sources (debt or equity) chosen to fund the bank.
profitability in Nigeria, while banking sector development, Banks with lower leverage, and thus higher equity,
stock market development, and financial structure were generally report higher ROA, but lower ROE.
insignificant. Also, Oladele, Sulaimon and Akeke (2012) Athanassoglou, (2005) argued that an analysis based on
found that operating expense; relationship between cost ROE disregards the risks associated with leverage, often
and income, and equity to total assets significantly a consequence of regulation. On the other hand,
affected the performance of banks in Nigeria. Ani et al. Goddard et al (2004) employed ROE as an appropriate
(2012) established that capital and asset composition profitability measure, arguing that for many European
positively affect bank profitability, while bank size had banks the off-balance-sheet business makes a significant
negative effect on profitability in Nigeria. contribution to total profit. The earnings generated from
Sufian and Habibullah (2009) examined the determinants these activities were excluded from the denominator of
of commercial bank profitability in Bangladesh using the ROA. In our analysis ROE has been used as the key ratio
data of 37 banks over the period 1997-2004. The result of for the evaluation of bank profitability, akin to the
the study indicated that loans intensity, credit risk and approach followed by Goddard et al (2004).
cost were the bank specific factors that had positive and
significant impact on the profitability of Bangladeshi
commercial banks. However, the finding of the study was RESEARCH METHODOLOGY
inconclusive with regard to the impact of size on
profitability. While size was found to have positive and This study employed annual data for all the 11 second
significant impact on ROAA and NIM, its impact on ROAE generation private commercial banks of Bangladesh for
is negative and significant. As far as the external factors the year 2015 and 2014. The total sample consisted of 22
were concerned, the study indicated that such factors (11 2) bank-year observations. The main source of data
had no significant impact on the profitability of was the annual report of each bank. It is worth noting
commercial banks in Bangladesh. Jahangir et al. (2007) here that all the 11 private commercial banks are listed in
examined the profitability in the context of Bangladeshi the Dhaka Stock Exchange. To capture the recent years
banking industry. The study was carried out on the data profitability determinants less emphasis has been given
from the year 2000 to 2005 of only the listed commercial to the time series analysis. On the other hand no
banks in DSE (Dhaka Stock Exchange). It was found that sampling has been made to select the banks. As the
there was a strong and significant relationship between profitability of private commercial banks seemed to be at
Determinants of Profitability of Commercial Banks in Bangladesh
Int. J. Bank. Finan. Law 005

the highest point in the recent years, our approach is was likely that the higher this ratio, the lower the need for
assumed to be very much logical to explain the high external funding and thus leads to the higher profitability
profitability of these banks. In our model, we presented of the bank. Equity to total assets ratio was expected to
one dependent and nine explanatory variables that have positive relation with performance that well-
influenced the profitability of a bank. Our objective of capitalized banks face lower costs of going bankrupt
choosing the proxies was to capture the significant which reduced their costs of funding and risks (Berger,
determinants of profitability. Multiple regression analyses 1995; Bourke, 1989; Hassan and Bashir, 2003).
were run for the year 2015 and 2014 to explain the
relationship between ROE and independent variables. Asset Quality

Variables To address the asset quality two ratios were used in this
study: loans to total assets (LA) and non-performing
To analyze the determinants of the profitability of private loans to total loans (NPL). As loans was one of the main
commercial banks 10 variables included in this study, one source of income of a bank, the ratio loans to total assets
of them was the dependent and the others were as was expected to affect profitability positively unless an
explanatory or independent variables. unacceptable level of risk is taken by a bank. Non-
performing loans (loans which are considered not to
Dependent Variables generate earnings) to total loans ratio measures the
asset quality of bank. In other words, it reflected the
In most of the literature, banks profitability, usually health of banks loan portfolio that affects performance of
measured by return on asset (ROA) and return on equity bank negatively. The higher the NPL ratio the poorer the
(ROE). In this study, Return on Equity (ROE) was used quality of loan portfolio and therefore it leaded to lower
as measures of banks profitability. ROE was determined profitability.
as net profit divided by total equity and was expressed in
percent. ROE showed the profit earned per dollar of Deposits
equity and most importantly
Deposits were considered as banks main source of
Independent Variables funding and are the lowest cost of funds. The more
deposits were transformed into loans, the higher the
By reviewing several literatures, it was found that several interest margin and profit. Hence, deposits generally had
researchers identified some common factors which positive impact on profitability of the banks. But if a bank
influence profitability of a bank. Summarizing the results could not transform its deposits into loans efficiently it
from numerous studies, bank specific financial ratios might bring negative impact on profitability also.
representing capital adequacy, cost efficiency, income
expenditure mix, asset quality, and size are mostly used Investment Activities
internal variables. So we included the following bank
specific variables to capture the determinants of Banks are not engaged in the deposit and lending
profitability: activities only they also invest significant amount of their
assets in Government securities, shares and debentures.
Asset Size To capture the influence of investment activities on
profitability two ratios were used in this study: investment
In many finance literature, total assets of the banks were in government securities to total assets (IGSEC) and
used as to capture the possible effect of banks size on other investment to total assets (OI). Investment in
profitability. Generally natural logarithm of total asset (log government securities mainly includes government
A) was used to represent bank size. The effect of bank treasury bills, bonds, debenture etc. To maintain the
size on profitability is generally expected to be positive statutory liquidity requirement of central bank commercial
(Smirlock, 1985). Eichengreen and Gibson (2001) banks, need to investment certain percentage of their
suggested that the effect of a growing banks size on assets to government securities. This investment is
profitability might be positive up to a certain limit. Beyond always considered to be a safe investment, but it may or
this point the effect of size could be negative due to may not have positive influence on profitability as the
bureaucratic and other reasons. Hence, the size return from government securities is not always
profitability relationship might be expected to be non- competitive with the market. On the other hand, all the
linear. investment other than the government securities is
included in the Other Investment category. Other
Capital Adequacy investment of a bank mainly includes investment in
quoted and unquoted shares and debentures of private
The ratio of equity to total assets (CA) was generally sectors. Besides shares and debentures investment in
used to represent the basic ratios for capital strength. It subsidiaries and miscellaneous investment are also
Determinants of Profitability of Commercial Banks in Bangladesh
Islam et al. 006

Table 1. Variables of profitability analysis and their measurement

Variable Measure Notation

Dependent variable Profitability Return on Equity (ROE)=Net ROE
Profit/Total Equity
Independent Variables Asset Size Natural Logarithm of Total logA
Capital Adequacy Equity/ Total Assets CA
Asset Quality Loans / Total Assets LA
Non-Performing Loans
/ Total Loans NPL
Deposit Deposits/Total Assets DP
Income-Expenditure Net Interest Margin = Net NIM
Structure Interest Income/ Total

Non-Interest Income =Non- NII

Interest Income /Total
Investment Investment in Govt. IGSEC
Activities securities/Total
Other Investment/ Total
Assets OI
So, our profitability model would be as follows:
ROE = 0 + 1LogA + 2CA + 3LA + 4NPL + 5DP + 6NIM + 7NII + 8IGSEC+
9OI +

Table 2. Descriptive statistics of the variables

Minimum Maximum Mean Standard

ROE 0.08 0.18 0.1176 0.02990
Log A 5.05 5.45 5.2541 0.12382
CA 0.06 0.12 0.0860 0.01707
LA 0.5 0.73 0.6423 0.05726
NPL 0.02 0.09 0.0573 0.01884
DP 0.76 0.85 0.8027 0.02453
NIM 0.01 0.04 0.0211 0.01200
NII 00 0.04 0.0211 0.012
IGSEC 0.08 0.30 0.1686 0.06001
OI 00 0.05 0.0205 0.01386

included in this category. Other investment was expected above table 2. For each variable shows minimum,
to have a positive impact on the profitability but it was not maximum, mean and standard deviation of eleven
unusual to have a negative impact on the profitability commercial banks in Bangladesh. On an average those
when there was a downturn in the economy. bank has ROE is about 11.76% the ROE does not vary
greatly across the bank because the standard deviation is
about 2.99% whose minimum value is about 8% and
ANALYSIS OF THE BANKS PROFITABILITY maximum value is about 18%. Asset size is determined
by the natural logarithm of total asset the mean of the
In this section we will try to analyze the data and present asset size is 5.25 and minimum and maximum value are
the result in various segments such as descriptive 5.05 and 5.45 respectively and standard deviation is
statistics correlation matrix among the variables and 0.12. Average of capital adequacy ratio is 8.6% and
finally we will fit a regression model which will give us the minimum and maximum values area 6% and 12%
appropriate result about the research respectively and standard deviation is 1.7%. The average
loan amount 64.23% and minimum and maximum values
Descriptive Statistics are 5% and 73% respectively and standard deviation is
5.72%. The average value of nonperforming loan is
The Descriptive statistics of the variables are given in the 5.73% and minimum and maximum values are 2% and
Determinants of Profitability of Commercial Banks in Bangladesh
Int. J. Bank. Finan. Law 007

Table 3. Correlation Matrix among the variables


ROE Pearson Correlation 1 .045 .424(*) .223 -.616(**) .209 .355 -.231 -.369 -.134
Sig. (2-tailed) . .842 .049 .318 .002 .350 .105 .302 .091 .551
N 22 22 22 22 22 22 22 22 22 22
LOGA Pearson Correlation .045 1 .500(*) -.130 -.123 -.395 -.081 .150 .119 -.220
Sig. (2-tailed) .842 . .018 .564 .585 .069 .721 .506 .599 .325
N 22 22 22 22 22 22 22 22 22 22
CA Pearson Correlation .424(*) .500(*) 1 .024 .452(*) -.364 -.504(*) .341 .461(*) -.019
Sig. (2-tailed) .049 .018 . .916 .035 .096 .017 .120 .031 .932
N 22 22 22 22 22 22 22 22 22 22
LA Pearson Correlation .223 -.130 .024 1 -.320 .118 .077 .233 -.553(**) .415
Sig. (2-tailed) .318 .564 .916 . .147 .601 .733 .297 .008 .055
N 22 22 22 22 22 22 22 22 22 22
NPL Pearson Correlation -.616(**) -.123 .452(*) -.320 1 -.051 -.327 .101 .471(*) .008
Sig. (2-tailed) .002 .585 .035 .147 . .822 .138 .656 .027 .970
N 22 22 22 22 22 22 22 22 22 22
DP Pearson Correlation .209 -.395 -.364 .118 -.051 1 -.009 -.346 .072 .605(**)
Sig. (2-tailed) .350 .069 .096 .601 .822 . .967 .115 .752 .003
N 22 22 22 22 22 22 22 22 22 22
NIM Pearson Correlation .355 -.081 -.504(*) .077 -.327 -.009 1 -.425(*) -.543(**) -.201
Sig. (2-tailed) .105 .721 .017 .733 .138 .967 . .049 .009 .371
N 22 22 22 22 22 22 22 22 22 22
NII Pearson Correlation -.231 .150 .341 .233 .101 -.346 -.425(*) 1 .084 -.034
Sig. (2-tailed) .302 .506 .120 .297 .656 .115 .049 . .711 .881
N 22 22 22 22 22 22 22 22 22 22
IGSEC Pearson Correlation -.369 .119 .461(*) -.553(**) .471(*) .072 -.543(**) .084 1 -.322
Sig. (2-tailed) .091 .599 .031 .008 .027 .752 .009 .711 . .144
N 22 22 22 22 22 22 22 22 22 22
OI Pearson Correlation -.134 -.220 -.019 .415 .008 .605(**) -.201 -.034 -.322 1
Sig. (2-tailed) .551 .325 .932 .055 .970 .003 .371 .881 .144 .
N 22 22 22 22 22 22 22 22 22 22
*Correlation is significant at 0.05 levels (Two-tailed)
**Correlation is significant at 0.001 levels (Two-tailed)
Source: calculated by the author from the annual report of banks.

Determinants of Profitability of Commercial Banks in Bangladesh

Islam et al. 008

Table 4a. ANOVA

Model Sum of Squares df Mean Square F Sig.

Regression .015 9 .002 4.569 .009(a)
Residual .004 12 .000
Total .019 21
Predictors: (Constant), OI, NPL, NII, LOGA, NIM, LA, DP, CA, IGSEC
Dependent Variable: ROE
Source: calculated by author from annual report of banks.

Table 4b. Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .880(a) .774 .605 .01880
Predictors: (Constant), OI, NPL, NII, LOGA, NIM, LA, DP, CA, IGSEC
Source: calculated by author from annual report of banks.

9% respectively and standard deviation is 1.88%. The relation was not statistically significant. Again ROE and
average value of deposit is 80.27% and minimum and NII (Non-interest income) were negatively related i.e. if
maximum values are 76% and 85% respectively and NII increase the ROE will also be Decrease and their
standard deviation is 2.45%. The average value of net relation was not statistically significant. Again ROE and
interest margin is 2.115 and minimum and maximum IGSEC (Investment on Government Securities) were also
values are 1% and 4% respectively and standard negatively related and their relation was not significant
deviation is1.2%. The average value of noninterest and lastly ROE and OI (Others Investment) were
income is 2.11% and minimum and maximum values are negatively related and the relation was not significant.
0% and 4% respectively and standard deviation is 1.2%. From the below correlation matrix, Log A (Asset size) and
The average value investment in government securities is CA (Capital Adequacy were positively related i.e. if asset
16.86% and minimum and maximum values are 8% and size increase then capital adequacy will also increase
30% respectively and standard deviation is 6%. The and their relation was statistically significant. CA and NPL
average value of others investment is 2.055 and were also positively related and the relation was
minimum and maximum values are 0% and 5% statistically significant. Again CA, NIM and IGSEC were
respectively and standard deviation is 2.05%. positively related and their relation was statistically
significant. Again LA and IGSEC were negatively related
Correlation among the variables and their relation was significant.

From the below correlation matrix table 2, it indicated that Regression analysis
ROE and log A were positively correlated but the
correlation was not significant. It explained that if asset From the above ANOVA it is clear that our regression
size increases the ROE will also increase. Again ROE model is statistically significant and we reject our
and CAR (Capital Adequacy Ratio) were positively research null hypothesis and accept the alternative
related and their relationship was significant i.e. if CA hypothesis ie we can say that there is a significant
increases then ROE will also increase. Again ROE and relationship between internal factors and banks
LA (Loan Amount) were positively related i.e. if LA profitability.
increases then ROE will also increase but their The model seems to fit the panel data reasonably well,
relationship was not statistically significant. Again ROE having fairly stable coefficients. The relatively high R
and NPL (Non Performing Loan) were negatively related square suggests that variations in the dependent variable
which indicated that if NPL increase then ROE will must profitability, as measured by ROE, are explained
be decrease and their relationship was statistically satisfactorily by variations in the selected variables.
significant. Again ROE and DP (Deposit) were also
positively related which explained that if deposit increase From the below regression coefficient table we can say
then ROE will also be increase but their relationship was that LA and NPL are statistically significant and LA has
not statistically significant. Again ROE and NIM (Net positive effect and NPL has negative effect of the bank
interest income) were positively related which meant that profitability and the remaining variables has impact on
if NIM increase then ROE will also be increase but their bank profitability but they are not statistically significant.
Determinants of Profitability of Commercial Banks in Bangladesh
Int. J. Bank. Finan. Law 009

Table 5. Regression Coefficient

Model Unstandardized Coefficients t Sig.

B Std. Error
1 (Constant) 1.182 .395 2.991 .011
LOGA -.060 .051 -1.159 .269
CA .113 .681 .166 .871
LA .358 .142 -2.519 .027
NPL -1.282 .323 -3.967 .002
DP .580 .490 -1.183 .260
NIM .408 .850 .480 .640
NII -.160 .455 -.352 .731
IGSEC -.073 .240 -.304 .766
OI .790 .824 .958 .357
Source: calculated by author from annual report of banks.

As expected, the value of the credit risk coefficient is study identified that asset size had no significant effect on
negatively and significantly related to bank profitability. It profitability. Interest income is always considered to be
appears that Bangladesh banks implement risk-averse the main source of income of a bank, but in our study it
strategies in their attempt to maximize profits, mainly was found that NIM/assets ratio did not have a significant
through systematic controls and monitoring of credit risk. impact on profitability. But the most significant variable
The banks under scrutiny, as well as the whole banking which affected the profitability was found to be the loan
sector in Bangladesh, have significantly higher level of amount. This indicated that greater diversification in
non-performing loans. Furthermore, non-performing loans banking activities positively influenced profitability. It was
tend to remain on the banks balance sheets. Advanced also identified that investment activities, mainly in shares
risk management techniques, strict lending policies and debentures (quoted and unquoted) of private sectors
reinforced by reliable monitoring systems and non- had a positive impact on ROE but not significant. It
performing loan restructuring appear to have had a direct suggested that banks which were more exposed to the
impact on reducing the banks provisions for loan defaults capital market or invest higher proportion of funds in
which in turn boosts profitability. The related literature unquoted shares and debenture might be achieved
indicates that the effect of credit risk on profitability is higher profitability. The findings of this study have
clearly negative (Athanassoglou et al, 2005). The sign of considerable policy relevance. It could be argued that the
the coefficient indicates that the higher the credit risk more profitable bank will be able to offer more new
assumed by a bank, the higher the accumulation of products and services. The role of diversified banking
defaulted loans. In turn, the higher the level of loans in activities is particularly important, given that a bank with
default, the greater the negative impact on bank relatively more innovative ideas and better fund
profitability. management capability may have added advantage over
its peers (Sarker et al, 2015). As per the portfolio theory
diversification reduces risks, so various sources of
DISCUSSION earning should be welcomed. But if this earning includes
higher proportion of volatile trading activity rather than
The banking sector of Bangladesh has undergone low risk income streams like fees and commission, the
noteworthy financial reforms, which has significantly risk may become higher. In our study it was observed
transformed the sector. At present private commercial that higher proportion of investment activities (other than
banks are dominant in respect of market share and the government securities) could help to achieve higher
profitability in this sector (Sarker and Rashid, 2015). level of profitability, so a bank may have tendency to
Profitability is always an important criterion to measure increase its exposure to the capital market. More
the performance of banks. This study examined the exposure in the capital market may bring more risk to a
determinants of private commercial banks profitability in bank as the investment decision in the developing capital
Bangladesh by using the data obtained from the financial market like Bangladesh depends mostly on speculation
statements of all the private commercial banks (11 rather than the real financial indicators. It suggested that
commercial banks) for the year 2015 and 2014. The non-traditional activates of banks (other than deposit
Determinants of Profitability of Commercial Banks in Bangladesh
Islam et al. 010

taking and lending) might lead banks to higher exposure Athanasoglou PP, Delis MD, Staikouras CK (2006).
to the risk. So the ability to maximize risk adjusted Determinants of Bank Profitability in the South Eastern
returns and sustaining stable and competitive returns is European Region. Munich Personal RePEc Archive.
an important element in the banking business. Thus, from Retrieved from
the regulatory perspective, risk management should be Berger AN (1995). The Relationship between Capital and
the key focus. The policy direction should be directed in Earnings in Banking. Journal of Money, Credit and
such a way which will enhance the resilience and Banking, 27(2): 432-456.
efficiency of the financial institutions with the aim of Bourke P (1989). Concentration and other determinants
intensifying the robustness as well as stability of the of bank profitability in Europe, North America, and
banking sector. In this regard, capital adequacy should Australia. Journal of Banking and Finance, (13): 65-79.
be emphasized so that banks are able to withstand any
negative shock. Ring-fencing traditional banking from Davydenko A (2010). Determinants of Bank Profitability in
investment banking and putting limit on the exposure to Ukraine.Undergraduate Economic Review, 7(1/2).
risk taking investment activities can be one of the way to Demirgc-Kunt A, Huizinga H (1999). Determinants of
minimize the risk. The risk taking investment activities Commercial Bank Interest Margins and Profitability:
also should be monitored very closely by the supervisor. Some International Evidence. The World Bank
Bank profitability could be improved considerably if Economic Review, 13(2): 379-408.
appropriate mechanisms to screen, monitor and forecast Dietrich A, Wanzenried G (2009). What Determines the
future levels of risk are put in place. Banks profitability is Profitability of Commercial Banks? New Evidence from
expected to be sensitive to macroeconomic variables Switzerland.12th Conference of the Swiss Society for
such as Gross Domestic Product rate (GDP), inflation Financial Market Researches, Geneva. Discussion
rate (INF) and real interest rate (RI). Due to limited data Paper.
availability and time constraints, those external variables Eichengreen B, Gibson HD (2001). Greek banking at the
have not been included in this study. There is also scope dawn of new millennium, CERP Discussion paper, no.
to analyze the linkage between the banks profitability 2791, London.
and their exposure to the capital market more intensively. Flamini V, McDonald C, Schumacher L (2009).
Another potential important aspect is to analyze the Determinants of profitability in Sub-Shaharan Africa.
determinants of profitability by a panel data set. IMF Working Paper NO 09/15, 1-30.
CONCLUSION Goddard J A Molyneux P and Wilson 2004, Dynamics of
growth and profitability in banking,Journal of Money;
Our findings showed that private commercial banks were Credit and Banking,(36):1069-1090.
the dominant in the banking industry based on profitability Haque A, Tariq A (2012). Efficiency of banks in Pakistan:
and market share. The study examined the determinants A non-parametric approach. Business and Economic
of commercial banks of Bangladesh using data obtained Research2, (1)1-12.
from financial statement of the respective bank. We
examined the data for the year of 2014 and 2015 of Hassan MK, Bashir A (2003). Determinants of Islamic
eleven commercial banks. Our study revealed that the Banking Profitability. Paper Presented at the
interest income was the main income of the bank and Proceedings of the Economic Research Forum 10th
asset size did not have a significant effect on profitability. Annual Conference, Marakesh-Morocco.
It also suggested that a high return of asset is not Jahangir N, Shill S, Haque MAJ (2007). Examination of
mandatory for large bank. It indicated that profitability Profitability in the Context of Bangladesh Banking
influenced by greater diversification of banking activities. Industry, ABAC Journal, 27 (2).
Our study also revealed that a higher investment of a Khrawish HA (2011). Determinants of Commercial Banks
commercial bank helped to achieve the more profitability. Performance: Evidence from Jordan. International
Research Journal of Finance and Economics, (81) 148-
REFERENCES Naceur SB (2003). The Determinants of the Tunisian
Banking Industry Profitability: Panel Evidence.
Aburime TU (2008). Determinants of Bank Profitability: Universite Libre de Tunis Working Papers.
Macroeconomics Evidence from Nigeria. Lagos Journal Naceur SB, Goaied M (2008). The determinants of
of Banking, Finance and Economics, Available at commercial bank interest margin and profitability: 1231064. Evidence from Tunisia. Frontiers in Finance and
Ani WU, Ugwunta DO, Ezeudu IJ, Ugwuanyi GO (2012). Economics, 5(1):106130.
An Assessment of the Determinants of bank Oladele PO, Sulaiman A, Akeke N (2012). Determinants
Profitability in Nigeria: Bank Characteristics Panel of bank performance inNigeria, International journal of
Evidence. Journal of Accounting and Taxation, 4(3):38- Business and Management Tomorrow,.2 (2I): 2249-
43. 9962.
Determinants of Profitability of Commercial Banks in Bangladesh
Int. J. Bank. Finan. Law 011

Olweny T, Shipho TM (2011). Effects of Banking Sectoral Sufian F, Habibullah MS (2009). Bank specific and
Factors on the Profitability of Commercial Banks in macroeconomic determinants of bank profitability:
Kenya. Economics and Finance Review, 1(5):1-30. Empirical evidence from the China banking sector,
Saona, PH (2011). Determinants of the Profitability of the Front. Econ. China, 4(2): 274291.
US Banking Industry. International Journal of Business Trujillo-Ponce A (2012). What determines the profitability
and Social Science, 2(22): 255-269. of Banks? Evidence from Spain, Journal of accounting
Sarker MNI, Islam MS, Rahman MM (2015). Effects of and Finance, Early view, Doi: (10): 1111.
electronic banking on performance of banks in
Bangladesh. Int. J.Appl. Res., 1(1):28-34. Accepted 21 April, 2017
Sarker MNI, Rashid MHO (2015). An Impact of Banking
Activities of Private Commercial Islamic Bank to Citation: Islam MA, Sarker MNI, Rahman M, Sultana A,
Economic Development in Bangladesh: A Case Study Prodhan AZMS (2017). Determinants of Profitability of
on First Security Islami Bank Limited (FSIBL). Journal Commercial Banks in Bangladesh. International Journal
of Investment and Management. 4(5):264-272.doi: of Banking and Financial Law 1(1): 001-011.
Sharma P, Gounder N (2012). Profitability Determinants
of Deposit Institutions in Small, Underdeveloped
Financial Systems: The Case of Fiji. Griffith Business
Copyright: 2017 Islam et al. This is an open-access
School Discussion Papers Finance, 2012-06.
article distributed under the terms of the Creative
Smirlock M (1985). Evidence on the (Non) Relationship
Commons Attribution License, which permits unrestricted
between concentration and profitability in Banking.
use, distribution, and reproduction in any medium,
Journal of Money Credit and Banking, (17): 69-83.
provided the original author and source are cited.
Staikouras CK, Wood GE (2004). The determinants of
European Bank Profitability, International Business
and Economics Research Journal, 3(6):

Determinants of Profitability of Commercial Banks in Bangladesh