University of Dhaka

Submitted to:
Department of Banking and Insurance
University of Dhaka

Supervised By
Dr. Md. Main Uddin
Professor
Department of Banking and Insurance
University of Dhaka

Submitted by: G-3

Aronyo Aminul- 057
Mohammed Rijwan- 034
Farhan Mahtab- 041
Sanjida Islam- 117
Mohammad Rayhan Islam- 058
Ebnul Faiaz Tonim- 087

Date of Submission: June 7, 2023.

 A Study on Monetary Policy & Profitability of Commercial Banks in
Bangladesh

Problem Statement: The proposed research aims to investigate the relationship between monetary
policy and the profitability of commercial banks in Bangladesh. Monetary policy plays a crucial role in
shaping the overall economic environment, and commercial banks are vital intermediaries that facilitate
the allocation of funds in an economy. Central banks employ the bank rate, the cash reserve ratio (CRR),
and open market operations (OMO) to control the amount of money in circulation. The profitability of
the commercial bank is directly correlated with the changing of these policies. The changing of interest
rates, amount of cash reserves, the circulation of money through trading the assets etc. affecs directly
to the commercial banks as the major allocator of the monetary policy. Bank earnings can increase or
decrease based on these policies taken by the central bank relative to the economy. The relationship
between monetary policy and bank profitability is therefore clear. So, this debate is about whether bank
lending is significant in the monetary transmission mechanism and whether government monetary
policy has an impact on bank lending and, eventually, on bank profitability. Understanding the impact
of monetary policy on bank profitability is essential for policymakers, regulators, and both conventional
and Islamic commercial banks themselves to make informed decisions and enhance financial stability
and performance.

Research Objectives: The overarching goal or purpose of the study is to determine how monetary
policy elements affect the profitability commercial banks. In specific, we will work on-

• Identifying the trends in profitability and conduct a comparison of between Islamic and
Conventional banks.
• Examining the effects of Required Liquid Reserve on the financial performance
• Assessing the effects of money supply on the financial performance.
• Determining the effects of domestic credit growth on banks' profitability.
• Determining the effects of targeted GDP Growth on banks' profitability.
• Ascertaining the effects of short-term interest rate and Long-Term Interest Rates the financial
success of both groups of institutions.

Methodology: The proposed research will adopt a quantitative approach, utilizing secondary
data from relevant sources. The study will cover a period of at least ten years to capture both
short-term and long-term effects. The research methodology will involve the following steps:
Variables: Primarily the dependent variables are Return on Asset and Return on Equity. The
explanatory variables are Required Liquid Reserve, Money Supply, Domestic growth, Targeted
GDP growth, Short term and Long term interest rates, Actual GDP growth, Actual Inflation
rate, Capital Adequacy Ratio.
Sample: This study includes only secondary data from Bangladesh’s five Islamic (Islami Bank
Bangladesh Ltd, Al-Arafah Islami Bank Limited, Social Islami Bank Limited, Exim Bank Limited,
Shahjalal Islami Bank Limited) and five commercial banks (Agrani Bank Limited, City Bank, Prime
Bank Limited, BRAC Bank Limited, Janata Bank) operating in Bangladesh.
Data Collection: In the study the data is collected from 2011 to 2020 of the five Islamic banks and
five conventional commercial banks of Bangladesh Hence, the study is based on panel data of 100
observations. Data on Islamic and conventional banks’ profitability is gathered from their respective
annual reports, while data on monetary policy will be gathered from Bangladesh Bank’s policy
statements.
 Data Analysis Techniques: As part of the study, First, the trend analysis of profitability between the
two classes of banks will be conducted. For this purpose, the arithmetic average of profitability of every
bank for selected each year will be taken. Then, secondly, regression analysis will be incorporated to
determine the probable impact of the monetary policy component of both classes of banks’ profitability
to accomplish the primary objective of the study.

Expected Results and Discussion:

Based on existing literatures it can be said that the interest rate has direct impact on the profitability of
the commercial banks, where’s Islamic Banks may have the negative relationship (Kassim et al., 2009).
Also, there may a change in monetary policy regime might have a significant influence on the market
prices of bank stocks mostly negatively Amidu & Wolfe et al., 2008) Another study shows, tightening
monetary policy can harm banks with inadequate liquidity and borrowers who rely on financial
institutions (Peek & Rosengren et al., 2010) The prime rate and inflation level set by the central bank
have a negative impact on bank lending. A case study on Bangladeshi Banks shows, the bank’s financial
performance is influenced positively by utilization of assets and efficiency in operations, and negatively
by credit risk. The cash reserve ratio negatively affects the profitability of investigated commercial
banks in Bangladesh (Hoque et al., 2020).

Conclusion: The aimed study, however, is a comprehensive look up on the effects of monetary policy
on the commercial banks profitability of Bangladeshi banks and a comparison between the Islamic and
Conventional banks. Moreover, the paper will provide several information on money, GDP, inflation,
credit control etc. relative to the study. The research will be an apotheosis for the potential scholars and
interested parties.