Professional Documents
Culture Documents
Syed Moudud-Ul-Huq
School of Management, Huazhong University of Science and Technology
Wuhan, Hubei 430074, P. R. China
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Abstract
This study attempts primarily to measure the financial performance of banking industry of
Bangladesh for the periods 2013–2014 and to rate them according to the composite rating system.
For this purpose, 10 private commercial banks (PCBs) have been selected from 38 PCBs. CAMEL
has critically analyzed the financial performance of these banks. This finds that most of the banks get
2.14 with an average rating of composite range, where only Eastern Bank Ltd. gets \Strong" rating,
seven PCBs get \Satisfactory" rating, AB Bank Ltd. and City Bank Ltd. lay middle of the range of
composite score. From this ground, it is clearly reflected that most of the PCBs in Bangladesh have
performed quite satisfactorily in recent years. The performance of most banks is dependent more on
the managerial ability in formulating strategic plans and the efficient implementation of its strategies.
Maintenance of asset quality is the major challenge in this year and is feared to remain so in 2014.
The banking sector in Bangladesh has passed somewhat an average year regarding governance,
profitability and soundness in 2013. Finally, it is recommended that the banks should be more careful
to ensure the quality of assets and its uses, and increased their efficiency in managerial grids.
1. Introduction
The economic expansion of a country relies more on the modernization of agri-
culture, industrial growth and development, expansion of domestic and foreign
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trade, etc. The financial mechanism and its role and importance in the banking
sector cannot be ignored in the development of a nation. It is undoubtedly true that
the financial sector plays the anchor role in the economy through execution of
monetary policy on behalf of the government laying down specific objectives
regarding development. Therefore, a sound financial system is required as indis-
pensable for the developed and structured economy. A sound banking industry
embraces a dominant element of the financial services sector. To a large extent, the
performance of banking sector is of paramount interest in the recent studies and
measuring its performance is a challenge as there are multiple steps. However, the
performance of the banking sector is critical for the economic progress of a
country, and a sound banking system plays as the role model for the economic,
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Bangladesh plays a key role in the allocation of resources and in financial plan-
ning. In the very beginning of their studies, Mckinnon (2010) and Shaw (1973)
emphasized on the impact of the financial system to the country's economic
growth. Both studies opined that there is a strong positive relationship between the
financial system and economic development.
Levine and Zervos (1998) conclude that development of financial systems
does extremely well for the economic growth through opening different channels.
There is a significant increase over the previous supervisory system of the
banking sector in the way of recovery, managerial efficiency, quality of assets,
quality of earnings and internal control mechanisms for minimizing the level of
risk and enhancing the financial stability of commercial banks. The regulatory
bodies have amplified bank regulation through applying capital adequacy, asset
quality, management quality, earnings and liquidity (CAMEL) rating approach to
assess and evaluate the performance and financial soundness of the activities of the
bank. The CAMEL supervisory approach in the banking sector is a significant and
considerable improvement over the earlier principles regarding frequency, checks,
spread over and concentration. During this period, the banking industry experi-
enced a paradigm change, and it was time to undertake performance appraisal of
operations.
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Performance of banking industry in Bangladesh
(1) CAMEL,
(2) Data envelopment analysis (DEA),
(3) Analytical hierarchy process (AHP),
(4) Economic value added (EVA).
In CAMEL, related ratios are used to evaluate the performance. Then a rating
system is used to categorize the banks, whereas in the DEA method, several input
and output rates are used. AHP method is based on the problem decomposition
into a hierarchy structure which consists of the elements like goal, alternatives,
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specialized banks, and three foreign banks. But now this has become one of the
biggest industries of Bangladesh. There are four nationalized commercial banks in
Bangladesh.
2. Literature Review
In this part, this paper delves to focus on existing studies that are based on
measuring the financial sector by using different approaches.
Kouser and Saba (2012) evaluated the Islamic banking of Pakistan by CAMEL
rating, where they found that Islamic banks, in general, have sound management
competency in comparison to conventional banks, whereas Nimalathasan (2008)
evaluates the banking industry performance based on a CAMEL.
Dash and Das (2009) applied the CAMEL rating and got information that the
five CAMEL factors indicate the increased likelihood of bank failure when any of
these five factors proves inadequate. Barr et al. (2002) suggested that CAMEL
rating criterion has become a concise and indispensable tool for examiners and
regulators. This evaluation criterion ensures a bank's health by reviewing different
aspects of the bank based on a variety of information sources such as financial
statement, funding sources, macroeconomic data, budget and cash flow. While
Siddique and Islam (2001) also exposed that the better performance of commercial
banks contributes to the economic development in Bangladesh.
Chowdhury (2002), in his study portrayed and suggested that commercial banks
should emphasize the performance of banks and entail knowledge regarding the
relationship between profitability and other factors such as the market size, bank's
risk, and bank size, etc.
Recently, Ashraf and Rehman (2011) compared and analyzed the performance
of conventional and Islamic banking in Pakistan through financial measures. In
this study, they conclude that the performance of Islamic Banks in Pakistan is
lagging behind in amplified operating cost and inefficiency.
Almazari (2011), in his study, has measured the financial performance of
some selected Jordanian commercial banks for the period 2005–2009. The study
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Performance of banking industry in Bangladesh
concludes that banks with higher total deposits, credits, assets and shareholders'
equity do not always show better profitability performance.
Rashid (2007) conducted a study in Pakistan during 1999–2006 and evaluated
the financial performance of Islamic banks by using financial ratios and found
useful results by analyzing with CAMEL approach.
Sarker (1999) has assessed the performance of Islamic banks in Bangladesh
based on their productive and operational efficiencies. The author found that Is-
lamic banks can provide efficient banking services and perform even better to
promote and stabilize the economy if given a chance to operate as a sole system
which would also help in demonstrating the potential of the Islamic financing
system.
by FUDAN UNIVERSITY on 04/21/17. For personal use only.
Bodla and Verma (2006) recommended that such types of rating would help the
J. Finan. Eng. Downloaded from www.worldscientific.com
Reserve Bank of India to identify special supervisory attention. The main attempt
of the CAMEL system is to find out problems which are faced by the banks and
catch up the comparative analysis of the performance of various banks.
It is observed that the quality of assets is commonly used as one of the most
crucial determinants of risk and of capital ratios (Kwan and Eisenbeis, 1997).
Also, it indicates that capitalization affects the functioning of the financial system.
More the capital, higher is the efficiency. Notably, Sarker (2005) analyzed the
CAMEL model for better regulation and supervision of Islamic banks.
Ho and Zhu (2004) showed that most previous studies focused on the opera-
tional effectiveness and efficiency for measuring performance. But they empiri-
cally used a two-stage DEA model to assess the performance and found that an
efficient company does not comply the sense that it is effectively in all respects.
Differently, Duncan and Elliott (2004) used the net interest margin (NIM),
return on assets (ROA), and capital adequacy ratio (CAR) as the financial per-
formance measures that also correlated with customer service quality. But in the
presence of a global financial condition, the assets quality and market con-
centrations are two significant determinants among others in the case of Nigerian
banks' performance (Alabede, 2012).
Most of the prior literature used financial ratios as the measure of bank per-
formance, which state that the comparative analysis of ratios between the present
and the past is the simplest way to examine the performance of a firm. That is,
steering the execution of decision by the managers regarding the direction of
change, improvement or remaining constant over time. Later, Van Horne and
Wachowicz (2005) complied with Pandey (2004) and they suggested financial
analysts use \checkups" to assess a firm's financial health. The primary tool of this
checkup is the financial ratio.
Chowdhury and Ahmed (2009) observed that all the selected PCBs achieved
stability during 2002–2006. Overall, growth of banks is remarkable in terms of
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evaluate the liquidity, solvency and efficiency of Japanese Banks, the research
J. Finan. Eng. Downloaded from www.worldscientific.com
evaluated capital adequacy, assets and management quality, earning ability and
liquidity. Olweny and Shipho (2011) found that the poor asset quality and low
levels of liquidity are the two principal causes of bank failures. Poor asset quality
led to many bank failures in Kenya in the early 1980s.
Gupta and Kaur (2014) conducted the research for measuring bank's perfor-
mance by using the CAMEL model and provided rating for top five and bottom
five Indian private banks. In a similar way, Reddy and Prasad (2011) have also
discussed the financial performance of selected regional rural banks during the
post-reorganization period. The study adopts CAMEL model to examine the
overall performance of Andhra Pragathi Grameena Bank and Sapthagiri Grameena
Bank. Recently, Siva and Natarajan (2011) empirically tested the applicability of
CAMEL and its considerable impact on the performance of SBI Groups. The study
has examined the applicability of CAMEL as a scanning tool to diagnose financial
health and alert banks to take preventive measures for its stability. However, Satish
et al. (2005) examined that Indian banks are strong enough, and information
technology will further improve its performance in the future. Nazir (2010) ex-
amined that liquidity management is one of essential functions of a bank. If funds
tapped are not adequately utilized, the institution will suffer loss.
At present, the current literature on performance evaluates the purpose of fi-
nancial institutions that is to make profits and reduce uncertainty for earning a
profit (Hempel et al., 1994). Duncan and Elliott (2004) determined that financial
performance is dependent on profit margin, ROA and CAR which are positively
correlated with customer service quality. The research suggests reducing nonper-
forming assets and introducing a policy to encourage fair competition among
the banks.
By using CAMEL as a tool for measuring bank success and failure, Nurazi and
Evans (2005) investigated that adequacy ratio, assets quality, management, earn-
ings, liquidity and bank size are statistically significant in explaining bank failure.
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Performance of banking industry in Bangladesh
From the above analysis of literature, a very few number of works have been
performed over the selected PCBs in Bangladesh based on CAMEL. That is why
an attempt has been taken to examine the bank performance through the CAMEL
model.
4. Research Methodology
4.1. Data collection and time frame
The scope of the study is confined to 10 well-established banking companies of
Bangladesh. This paper has taken into account the performance of the sample
banks for the year 2013–2014. It has made a full search of the existing literature
and recent relevant researchers published in domestic and international journals.
The study has relied basically on the annual reports of banks and DSE library
resources.1 Only CAMEL ratings have been used to examine the financial strength
of sample banks about capital adequacy, asset quality, management capacity,
earning ability and liquidity. Finally, the tables have been interpreted through the
standard criteria set by CAMEL ratings and ranking the individual bank based on
composite ratings.
1
DSE is one of the two securities and exchange commission of Bangladesh.
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quite tough to raise capital above the minimum capital level when the economy is
fragile. So, banks need to maintain capital above the required level, then they can
act as future risk absorber. As per Basel II, banks need to hold capital at least 10%
of risk-weighted assets or 4.0 billion (Taka) whichever is higher.2 Banks list their
CARs on their financial reports.
2
Please see Bangladesh Bank Annual Report: 2013–2014 available at: www.bb.org.bd.
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Performance of banking industry in Bangladesh
Source: www.crab.com.bd.
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Composite rating
Capital and
reserve/total risk
Name of banks weighted assets, % Above 11% 8–11% 4–8% 1–4% Below 1%
DBBL 13.70 Match
ABBL 10.80 Match
EBL 11.95 Match
DBL 12.18 Match
OBL 12.09 Match
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PCBs show their efficiency and generate profit up to the mark and four banks stay
behind the fair mark. The rest of the two PCBs are in upright position using up
their total assets. In case of ROE, only BRAC Bank ensures the maximum ROE
and DBBL provides its adequate level i.e., 26% and 17%, respectively. There are
Composite ratings
Formula (percentage of
qualified loan) 1 2 3 4 5
Nonperforming Above
Name of banks loan/total loan, % Below 1.5% 1.5–3.5% 3.5–7% 7–9.5% 9.5%
DBBL 3.90 Match
ABBL 3.80 Match
EBL 3.59 Match
DBL 4.15 Match
OBL 4.89 Match
Bank Asia 5.60 Match
City Bank 8.06 Match
NCC Bank 5.35 Match
Trust Bank 0.04 Match
BRAC Bank 3.60 Match
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Performance of banking industry in Bangladesh
Composite rating
Total profit/total
Name of banks employee Above 0.5 0.4–0.5 0.35–0.39 0.3–0.34 Below 0.3
Composite rating
Formula (ROA) 1 2 3 4 5
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Composite rating
Name of banks Total loan/total deposit, % Above 60 60–65 65–70 70–80 Below 80
DBBL 73 Match
ABBL 86 Match
EBL 80 Match
DBL 85 Match
OBL 88 Match
Bank Asia 79 Match
City Bank 84 Match
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six PCBs where the return on capital lies at an appropriate level, whereas the two
banks, i.e., NCC Bank and AB Bank are just behind the fair mark.
In Table 5, it shows that each is performed strongly for maintaining liquidity.
Table 6 shows that only EBL's composite rating lays in a strong position from
10 PCBs in Bangladesh and two PCBs get a fair rating and the rest seven PCBs
perform satisfactorily. The composite score here it provides Rank-1 for EBL,
Rank-2 for Dhaka Bank and One Bank Ltd., Rank-3 for DBBL, Rank-4 for Bank
Fair
Fair
Satisfactory
Satisfactory
Satisfactory
Satisfactory
Satisfactory
Satisfactory
Satisfactory
rating
Rank 3 8 1 2 2 4 7 4 6 5
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Performance of banking industry in Bangladesh
Asia and NCC Bank, Rank-5 for BRAC Bank, Rank-6 for Trust Bank, Rank-7 for
City Bank and finally, Rank-8 is given to AB Bank.
investment; and finally, banks should concentrate more on the issue of quality
assets management.
During the process of evaluation, the performance of banks highlighted that
different banks had obtained different ranks on CAMEL rating. The findings of the
study can be helpful for the management to undertake decisions regarding the
improvement of PCBs in Bangladesh and formulate policies as per the CAMEL
model. At the end, authors expect that this paper will attract a broader readership in
this field.
References
Alabede, JO (2012). The intervening effect of global financial condition on the determi-
nants of bank performance: Evidence from Nigeria, Accounting and Finance Re-
search, 1, 161.
Almazari, AA (2011). Financial performance evaluation of some selected Jordanian
commercial banks, International Research Journal of Finance and Economics, 68,
50–63.
Ashraf, MM and Z Rehman (2011). The performance analysis of Islamic and conventional
banks: The Pakistan's perspective, Journal of Money, Investment and Banking, 22,
99–113.
Barr, RS, KA Killgo, TF SIEMS and S Zimmel (2002). Evaluating the productive effi-
ciency and performance of US commercial banks, Managerial Finance, 28, 3–25.
Bodla, B and R Verma (2006). Evaluating performance of banks through CAMEL
Model: A case study of SBI and ICICI, The IUP Journal of Bank Management, 3,
49–63.
Chowdhury, A (2002). Politics, society and financial sector reform in Bangladesh, Inter-
national Journal of Social Economics, 29, 963–988.
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Performance of banking industry in Bangladesh
Siddique, S and A Islam (2001). Banking sector in Bangladesh: Its contribution and
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