Financial Performance Evaluation of Bank Industry in

Bangladesh: A Comparative Study

[This
Dissertation has been submitted to the Department of Business Administration as the
requirement for partial fulfillment of the degree of Master of Business Administration]

Submitted By
Minhajul Abedin
ID No: R193120
Program: MBA
(Major in Finance & Banking)

Date of Submission: 11th March, 2021

Department of Business Administration

Faculty of Business Studies
International Islamic University Chittagong
Financial Performance Evaluation of Bank Industry in
Bangladesh: A Comparative Study
[This
Dissertation has been submitted to the Department of Business Administration as the
requirement for partial fulfillment of the degree of Master of Business Administration]

Submitted By
Minhajul Abedin
ID No: R193120
Program: MBA
(Major in Finance & Banking)

Supervised By
Dr. Mohammad Nazim Uddin
Associate Professor
Department of Business Administration,
International Islamic University Chittagong

𝑺𝒊𝒈𝒏𝒂𝒕𝒖𝒓𝒆 𝒐𝒇 𝑺𝒖𝒑𝒆𝒓𝒗𝒊𝒔𝒐𝒓
Date of Submission: 11th March, 2021

Department of Business Administration

Faculty of Business Studies
International Islamic University Chittagong
 LETTER OF SUBMISSION

March 11th, 2021

To
Convener
MBA Internship/Dissertation/OCP Committee
Department of Business Administration
International Islamic University Chittagong
Subject: Submission of the Dissertation.
Dear Sir,
I would like to submit my dissertation on “Financial Performance Evaluation of Bank
Industry in Bangladesh: A comparative Study”. It has been prepared as an obligation for the
end of the MBA Program of International Islamic University Chittagong. While working on this
report, I have endeavored to follow the instructions that you have advised. It has been an
edifying experience to work on this dissertation.
Moreover, I want to thank you for the facilitation you have provided me. If you need any further
information while evaluating the dissertation, I would furnish you the same with profound
pleasure. Hence, I would be obliged if you go through my report and give your assessment to my
work considering my abridgement.
Yours Faithfully,
Minhajul Abedin
ID No.: R193120
Department of Business Administration
International Islamic University Chittagong

I
 ACKNOWLEDGEMENTS

The successful completion of this Thesis report is the result of the contribution
from number of people, especially those who have given the effort and their
valuable time to share their opinion and suggestions to improve the thesis .At first
my gratefulness goes to the Almighty God to give me strength and ability to
complete the Thesis. I am very much grateful to my honorable supervisor Dr.
Mohammad Nazim Uddin, Associate professor, Department of Business
Administration of International Islamic University of Chittagong for his
valuable suggestion, encouragement constructive criticism and for providing all
necessary supports to complete this thesis.

Last but not least, thanks go to my precious family for their never ending love and
inspire at every stage of our life. Without their continuous support I realize that I
would not be a person that I am now.

I welcome constructive criticism and any positive suggestion for the improvements
of the reports.

II
 ABSTRACT

This thesis paper examined the profitability determinants of bank industry in Bangladesh for the
year 2012 to 2019. The study employed annual data for all the 5 Islamic and 5 conventional
banks of Bangladesh for the year 2012 to 2019. Multiple regression analyses were run to capture
the significant determinants of profitability. The empirical findings from this study suggested
that Net profit Margin ratio had significant effect on the profitability. But the impact of
nonperforming investment to total investment (NPI) 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 the Islamic banks more profitable than conventional banks. 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.

III
 TABLE OF CONTENTS
No Particular Page
No
A Letter of Submission I

B Acknowledgement II

C Abstract III

Chapter One: Introduction (1-12)

1.1 Introduction 2
1.2 Statement of the problem 5

1.3 Rationale of the study 6

1.4 Objectives of the study 7

1.5 Sample, Data collection and Methodology 8

1.6 Scope and Limitations of the Study 11

1.7 Organization of Thesis 12

Chapter Two: Literature Review (13-23)

2.1 Introduction 14

2.2 Literature Review: Bangladesh Evidence 15

2.3 Literature Review: World Perspective. 18

2.4 Chapter Concluding 23

 Chapter Three: Research Methodology (24-28)

3.1 Introduction 25

3.2 Model Specification 25

3.3 Variable description 26

3.4 Method 28

Chapter Four: Description & Analysis (29-37)

4.1 Introduction 30

4.2 Determinants of the Bank industry’s Performance 30

4.3 Descriptive Statistics 30

4.4 Correlation Analysis 32

4.5 Test of Random Effects Model 35

Chapter Five: Conclusion & Recommendations (38-42)

5.1 Conclusion 39

5.2 Recommendations 40

References 42
CHAPTER: 01
INTRODUCTION

1
1.1 Introduction
The banking operation performs an essential part in the economic growth of a country.
Bangladesh, as a developing country, is no objection to this. In Bangladesh, the banking industry
controls the financial sector and the macroeconomic performance mainly depends on the
efficiency of the banking sector. The country’s banking industry includes Bangladesh Bank,
State-Owned Commercial Banks, Islamic Banks, Private Commercial Banks, Foreign
Commercial Banks, and other Specialized Financial Institutions. The financial sector in many
economies including Bangladesh is experiencing an enormous restructuring process in the
foregoing several years due to the huge change in the financial sector over the world. The recent
global recession has highlighted the necessity for banks to consolidate the idea of risk
management within their usual program. Several features of rising deregulation, introducing
innovative products, and financial instruments, as well as innovation in distribution channels,
have highlighted the demand for banks’ risk management.

Independence of Bangladesh witnessed yet another significant development in the banking

industry. Simultaneously, Bangladesh Bank, the Central Bank of the country was founded in
1972 by the presidential order No. 127 of 1972 (which took effect on December 16, 1971)
Through the order, the eastern branch of the former State Bank of Pakistan at Dhaka was
renamed Bangladesh Bank as full-fledged office of the Central Bank of Bangladesh. Bangladesh
Bank had adopted measures such as credit expansion, branch expansion, deposit mobilization
advances to priority areas through the banks. Shortly after the independence of Bangladesh,
banks began their operations under full government control.

This situation continued up to 1982. At that period, some laws were formed and some directions
were given to the banks with a view to filling the economic goals of the government rather than
to meet the commercial interest of the banks. Expansion of bank branches was also directed to
improve the network of the banking system. As a result, bank branches grew commendably
which consequently lessened the population per branch.

There was no domestic private commercial bank in Bangladesh until 1983. In 1983, the Arab
Bangladesh bank started Private Commercial Banking in the Country. Five more commercial
Banks came up in 1983. Consequently, in the mid-’90s some more banks in the private sector
also started operations. The third generation of private sector banks was given the approval to

2
run and initiated a steady growth in banking financial institutions. Finally 2012 the government
was given permission to operate six more banks in the private sector. There are fifty four
commercial banks in Bangladesh. Most of them are private banks and a few are foreign banks.

Bangladesh is a developing country in the third world. As such, the role of banks in the
development of the country is inevitable. But for the development of economic infrastructure,
boosting social awareness, development of human resources of the role of private sector banks
are more imperative than the nationalized banks. Moreover, side by side with our private banks,
foreign private banks are also coming up to make a contribution to the dissemination of
education and arrangement of free treatment of the poor people.

Bangladesh economy has been encountering speedy growth since the 1990s. Industrial and
agricultural expansion, international business, the inflow of expatriate Bangladeshi workers’
remittance, local and foreign investments in construction, communication, power, food
processing and service industries led in an era of economic movements. Urbanization and
lifestyle shifts side-by-side with the economic development generated a need for banking
products and services to support the new initiatives as well as to canalize consumer investments
in a profitable manner. Private Banks was created exclusively for a selected group of their client-
individuals whose financial demands are complicated and whose time is at a premium. They get
an excellent level of customer service that will feed to their every financial demand. With private
banking, they will form a strong working bond with their private banker. The private bank serves
the various field of expertise in the socio-economic industrial of financial services such as
commercial lending, retail banking, mortgage, investment, Consulting, retirement plan
administration, and agricultural development as well as in the overall economic development of
the country since its commencement through saving mobilization and investment of the fund.
They understand customer’s different wants as an wealthy individual and dedicated to giving the
client a extensive portfolio of particular products in time, confidential and the available access to
a full variety of personal and customer services designed to meet all of the financial demands.

In Bangladesh, the banking sector always performs well and there have two main pillars of the
banking sector operating within the country i.e. Conventional and Islamic banks. Islamic banking
has been developing globally at a very rapid pace. The Islamic finance industry in Bangladesh
has been in existence for more than 30 years. Bangladesh has various banking system comprising

3
nationalized, private, and foreign commercial banks. At present, there are 59 scheduled banks in
Bangladesh consist of 6 state-owned commercial banks, 2 specialized banks, 42 private
commercial banks & 9 foreign- commercial banks. Private Commercial Banks (PCB) can be
categorized into two groups: i) Conventional PCBs: 34 conventional PCBs are now operating in
the industry. They deliver the banking functions in a conventional way i.e. interest-based
operation. ii) Islami Shariah-based PCBs: There are 8 Islami Shariah-based PCBs in Bangladesh
and execute banking activities according to Islami Shariah-based principles i.e. Profit-Loss
Sharing (PLS) model.

Islamic banking as a new model commenced in Bangladesh in 1983 with the institution of the
first Islamic bank “Islami Bank Bangladesh Limited”. The addition of interest-free banking
systems showed their worth in the country’s money market and numerous new banks have been
founded to perform in compliance with Shariah and many traditional banks have begun their
Islamic banking windows. Islamic Banking means Islamic Shariah-based banking (without
interest) i.e. goals, purposes, and actions are to be done according to the laws of Islamic Shariah.
Conventional banking is based on interest and a pure financial intermediation form, whereby
banks essentially borrow from savers and then grant to enterprises or individuals. They make
their earnings from the margin between the borrowing and lending rates of interest. They also
give other banking services, like letters of credit and guarantees. A proportion of their profit
originates from the low-cost funds that they get through demand deposits.

The forms of services between Islamic banks and conventional banks are different.
Conventional banking functions on pre-fixed interest whilst Islamic banks based on profit
sharing. The forms of operations are different. Islamic banking refers to a system of banking or
banking activity that is compatible with Islamic law (Shari’ah) principles and conducted by
Islamic economics. In particular, Islamic law bans usury, the collection, and payment of interest,
also usually called riba. Generally, Islamic law also forbids trading in financial risk (which is
marked as a form of gambling). The obvious difference is the conventional banking operates on
pre-fixed interest whilst Islamic banks based on profit and loss sharing. The conventional banks
earn profits by attracting deposits from the depositors at a low-interest rate, then reselling those
funds to the borrowers at the higher interest rate, based on its competitive advantage at gathering
information and underwriting risk.

4
1.2 Statement of the problem

Financial measures have long been the basis for business performance measurement. These
measures revealed the performance and accomplishment in monetary terms, included in the chart
of accounts, and provided a high level of aggregate information. More importantly, financial
measures are well recognized and followed the rules of the General Accepted Accounting
Principles (GAAP). The financial measures are still common among most companies because
non-financial areas such as customer satisfaction, quality, market share and human resources,
direct to be subordinated to financial figures. In addition, the fundamental reliance by managers
on financial performance measures dominates organization strategy, particularly in the short run.
In addition, financial measures have been used for decades and managers are frequently
comfortable with them. Whilst it is acknowledged that the immediate outlook for the global
financial markets and ensuing world economic growth prospects appear challenging, the banks
operating in a favorable situation will remain resilient. Financial performance could be described
as a measurement of the results of a firm’s policies and operations in monetary terms. In
evaluating the overall financial condition of a company, the income statement and the balance
sheet are important reports, as the income, statement catches the company's operating
performance and the balance sheet shows its net worth. Financial performance could be
evaluated using the following key measures which are essential to assess the current financial
position and performance. These are descriptive and analytical measures of financial condition
and performance. Descriptive measures include total assets, total liabilities, stockholder's equity,
total revenues, total expenses, and net income. And analytical measures of financial condition
and performance could include profit-ability, efficiency, liquidity, and solvency ratios. This
study will measure the performance of the bank industry in Bangladesh by using NPM, ROA,
ROD, and ROE as profitability indicators affected by a group of financial factors (capital ratio,
bank size, and loans) as liquidity indicators. Also assets quality or credit performance (total
revenues/total assets, provisions/financing, and provisions/total assets).

5
1.3 Rationale of the study

Bangladesh is one of the fastest growing economies in Southeast Asia. In 2035, it will become
25th country in terms of GDP (BBC 2020). As the economy increases the operation of bank
industry will also increase. As we discussed earlier there are two types of banking operation in
Bangladesh such as; conventional banking & Islamic banking. Both conventional & Islamic
banking have enormous contribution to the economy they have two major functional differences.
First one is that where as the conventional banks follow borrowing and lending mechanism, the
Islamic banks follow trading and investment mechanism and neither accept nor pays interest in
any of its activities. And the other is conventional bank provide & receive interest for deposit &
advance but Islamic banks are concerned with profit in case of both deposit and investment. It is
found that Islamic banks perform better than Conventional banks in terms of capital adequacy,
assets quality, and management quality and earnings ability (Sk Alamgir H. & K. M. Anwarul I.
2017). It is also found that Islamic Banks are in strong position on their composite rating system
(Ahsan, 2016). The overall performance of all Islamic banks is satisfactory. The researchers
believe that the future of Islamic banking system in Bangladesh is very bright. But for exploring
the market opportunity the Islamic banks must develop market driven strategy (Ibrahim, 2014).
However Islamic banks are struggling in terms of advances, investment, liquidity, deposits and
capital as conventional banks performance is better in these areas. Islamic banks are charging
higher spread and share of distributable income to depositors is far less as compared to
conventional banks. Islamic banks need to focus on fair distribution of profit to its depositors in
order to increase its credibility and help in achieving overall Islamic socio economic objectives
of justice and equality. Islamic banks should focus on new products development and innovative
solutions to meet client’s needs, also Islamic banks needs to strengthen their equity base (S.
Aziz, 2016). Another main difficulty for the Islamic banking is shortage of consciousness among
the people concerning the Islamic Banking (Ali, 2013). Conventional banks are also doing better
performance than interest-free Islamic banks in terms of commitment to economy & community,
productivity and efficiency signifies that interest-based (Safiullah, 2010). Traditional banks are
more profitable than Islamic banks, while the latter is more liquid and less risky, especially with
respect to the risk-weighted capital ratio, than the Traditional banks (Osama A. H. 2013). It is
also realized that conventional banks have pioneer in the management and having a good earning

6
ability (Jaffar, 2011). Although, return on assets (ROA) is higher in Islamic banks, but this does
not imply higher efficiency. It is confirm that Islamic banks that thrive on interest-like products
(credit finance) are less likely to outshine Traditional banks on efficiency terms (Abu B. 2013).

1.4 Objectives of the study

The main objective of the study is to enhance my understanding of the practical activities and to
have a test of a professional environment. I believe that it not only helped me not only to know
about the profitability of the bank industry procedure activities but also to step into the
professional exposure. Since classification and provisioning are related to the financial
performance of the banks, it is also discussed and its correct status is presented here. In addition
to these, the following study is also summarized two types of objectives, viz.-broad objective,
and specific objectives. The broad objective of the study is to evaluate the financial performance
of bank industry in Bangladesh. The specific objectives of the study are:

❖ To evaluate the capital management performance, assets management performance,

managerial performance, earnings ability and liquidity performance of some specific
banks in Bangladesh.
❖ To identify the factors that influences the financial performance of bank industry in
Bangladesh.
❖ To evaluate the comparative the financial performance between conventional banks and
Islamic banks.

7
1.5 Sample, Data collection and Methodology

Sampling: In this study purposive sampling method has been used. January 2021, there are 60
scheduled banks operating in Bangladesh (different categories). Of them, five conventional
banks & five Islamic banks have been taken as sample for this study. They are:

Conventional Bank

1. Dutch Bangla Bank Limited.

2. AB Bank Limited.
3. International Finance Investment & Commerce (IFIC) Bank Limited.
4. Eastern Bank (EBL) Limited.
5. Mutual Trust Bank (MTB) Limited.

Islamic Bank

1. Islami Bank Bangladesh Limited.

2. Al-Arafah Islami Bank Limited.
3. Shahjalal Islami Bank Limited.
4. Social Islami (SIBL) Bank Limited.
5. Export Import (Exim) Bank Limited.
Extent: All over Bangladesh.
Time: Period of the survey.
Sample Size: Five conventional & Five Islamic banks.
Sampling is the only feasible way to collect research data in most situations.

Data Collection

In order to make the study more meaningful and presentable, it will be based on the two types of
data i.e. primary data and secondary data. Mainly secondary sources of data and information
have been used widely.

8
1. Primary Sources of data: For collecting information and data from the primary sources,
following techniques have been used:-

i. Sampling: In this study purposive sampling method has been used. January 2021, there
are 60 scheduled banks operating in Bangladesh (different categories). Of them, five
conventional banks & five Islamic banks have been taken as sample for this study. They
are:

Conventional Bank

6. Dutch Bangla Bank Limited.

7. AB Bank Limited.
8. International Finance Investment & Commerce (IFIC) Bank Limited.
9. Eastern Bank (EBL) Limited.
10. Mutual Trust Bank (MTB) Limited.

Islamic Bank

6. Islami Bank Bangladesh Limited.

7. Al-Arafah Islami Bank Limited.
8. Shahjalal Islami Bank Limited.
9. Social Islami (SIBL) Bank Limited.
10. Export Import (Exim) Bank Limited.

ii. Focused Group Discussion (FGD) have been made from the bank executives and
banking experts.
iii. Direct and personal Observation: In the premises of the ten banks, information on
qualitative variables has been collected from the customers. For collecting data the
researcher has surveyed the services of those banks physically and practically.

9
2. Secondary Sources of Data

The secondary data have been collected from –

❖ The publication of the private banks Banks' official records Annual reports of the banks.
❖ Publications of Bangladesh Bank.
❖ Ministry of Finance and other relevant organizations.
❖ Resume of activities of banks and financial institutions in Bangladesh.
❖ BIBM Journal.
❖ Journal of Institute of Bankers.
❖ Different books, articles, journals & newspapers.
❖ Dhaka Stock Exchange & Chittagong Stock Exchange.
❖ Website of respondent banks.

Methdology

The word method comes from the Greek words ‘Meta’ and ‘hodes’ meaning a way. Broadly, a
method or methodology is the underlying principles and rules of organization of a philosophical
system or inquiry procedure. Methodology is a process or technique in which various stages or
steps of collection of date / information are explained and the analytical techniques are defined.
A dictionary of social science observes, “Methodology is the systematic and logical study of the
principles guiding scientific investigation”. In general a method is the way of doing something.
Mainly the methodologies used in making this study are consultation with the several relevant
personnel and go through various manuals of banking: Besides this I have also collected
information from the company profile, different journals, annual report, and internet and gone
through the books on banking written by wise writers.

10
1.6 Scope and Limitations of the Study

Scope

The field of study for this particular research project is analyzing the performance of bank
industry in Bangladesh. The study focuses in depth specifically on performance of the banks &
their current status. The study has been focused on five commercial banks and five Islamic banks
with specifically emphasis on the operation & performance of AB Bank Ltd., Dutch Bangla
Bank Ltd., IFIC Bank Ltd., Eastern Bank Ltd., Mutual Trust Bank Ltd., Islami Bank Bangladesh
Ltd., Shahjalal Islami Bank Ltd., Exim Bank Ltd., Social Islami Bank Ltd., and Al-Arafah Islami
Bank Ltd.

Limitations

Every study has some limitations. It might be time limitations or cost limitations or information
limitations. These limitations can be highlighted below:

Non financial performance of the banks has not been considered in the present study.
Banks could not provide more information for policy or some obvious reasons, which
could be very much useful. They showed some sort of reluctance while providing
information.
Researcher has considered five basic categories of financial performance measuring
ratios. These may not represent overall financial performance of conventional & Islamic
banks.
Researcher has used ratio analysis of the data for five years only. Other analytical
techniques of analysis could have been used by considering data for longer periods.
Researcher could not select big sample size that could be more helpful in explaining
many other opinions of the research area.

11
1.7 Organization of Thesis

The whole thesis is divided into five chapters .The first chapter gives a Introduction, Statement
of the problem, Objectives, Scopes and limitations .The second chapter is a review of theoretical
and empirical literature related financial performance of banks .The third chapter research
methodology, Model Specification, Variable description, Chapter four presents the analyses and
discussions of results, recommendations while conclusions is the last chapter of this study.

12
 CHAPTER: 02
LITERATURE REVIEW

13
2.1 Introduction

A financial institution like a banking institute is the backbone of any country’s economy.
Bangladesh’s banking sector is comparatively larger in terms of the level of development and per
capita income. The economical force of the country is growing day by day. In the country, there
are lots of private commercial banks working under the central bank, Bangladesh Bank. After the
liberation war, the banking industry in Bangladesh began its journey with 6 nationalized
commercialized banks, 2 State-owned specialized banks, and 3 Foreign Banks. In the 1980s
banking industry reached notable enlargement with the introduction of private banks. Now, there
are 59 scheduled banks in Bangladesh who run beneath full control and guidance of Bangladesh
Bank which is authorized to do so through Bangladesh Bank Order, 1972 and Bank Company
Act, 1991. Scheduled Banks are divided into the following types: (a) State-Owned Commercial
Banks (SOCBs): There are 4 SOCBs that are fully or majorly owned by the Government of
Bangladesh. (b) Specialized Banks (SDBs): 3 specialized banks are now running which were
established for specific purposes like agricultural or industrial development. These banks are also
fully or majorly owned by the Government of Bangladesh. (c) Private Commercial Banks
(PCBs): There are 42 private commercial banks that are majorly owned by private entities. PCBs
can be categorized into three groups: Conventional PCBs: 34 conventional PCBs are now
operating in the industry. They do the banking functions in regular way i.e interest-based
transactions. Islamic Shariah based PCBs: There are 8 Islami Shariah based PCBs in Bangladesh
and they perform banking actions according to Islami Shariah based policies i.e. Profit-Loss
Sharing (PLS) model. Foreign Commercial Banks (FCBs): 9 FCBs are running in Bangladesh as
the branches of the banks which are incorporated overseas. There are now 5 non-scheduled
banks in Bangladesh which are: Ansar VDP Unnayan Bank, Karmashangosthan Bank, Palli
sanchay Bank, Grameen bank, Jubilee Bank. The competitiveness of Islamic banks with the
conventional bank provides the force to compare the profitability and liquidity between these
two extreme ways of banking. The goal of this dissertation is to examine which type of banking
is more profitable and what are the potential causes for supremacy for the particular type.
Today’s modern banks are not just presenting traditional banking but also developing many
financial services. In today’s world, the life of the people directly or indirectly are within the
platform of banking whether conventional or Islamic banking.

14
2.2 Literature Review: Bangladesh Evidance

Sk Alamgir H. & K. M. Anwarul I. (2017) in their study attempts to analyses and compares the
financial performance of Islamic and Conventional commercial banks operating in Bangladesh
during 2011 to 2015 using secondary data by applying CAMEL model and other relevant
statistical tools. The study revealed that Islamic banks perform better than Conventional banks in
terms of capital adequacy, assets quality, and management quality and earnings ability.

M. K. Ahsan (2016) in their study analyze the financial performance of three selected Islamic
Banks (Islami Bank Bangladesh Limited, Export Import Bank of Bangladesh Limited, Shahjalal
Islami Bank Limited) over a period of eight years (2007-2014) in Bangladeshi banking sectors.
For this reason, CAMEL Rating Analysis approach has been conducted and it is found that all
the selected Islamic Banks are in strong position on their composite rating system. They are
basically sound in every respect i.e., sound in capital adequacy, asset quality, management
quality, earning capacity and liquidity conditions.

Ibrahim et al. (2014) have used financial data obtained from the annual reports of the sample
banks the study has evaluated the performance of six Islamic banks listed at both Dhaka Stock
Exchange and Chittagong Stock Exchange. Their objectives were to evaluate the performance of
these banks, and to make a comparison among different Islamic banks from different variables.
The results show that some banks are better off than others using different ratios. The overall
performance of all Islamic banks is satisfactory. The researchers believe that the future of
Islamic banking system in Bangladesh is very bright. But for exploring the market opportunity
the Islamic banks must develop market driven strategy.

M. Abduh, S. M. Hasan, Alfatih G. P. (2013) conducted this study to investigate the efficiency
and performance of five Islamic banks in Bangladesh namely, Islami Bank Bangladesh Limited,
AlArafah Islami Bank Limited, Social Islami Bank Limited, Shahjalal Islami Bank Limited and
First Security Islami Bank Limited. Data are collected through their published annual reports
from the year of 2006 to 2010. In addition, methods used to measure the performance and
efficiency of Islamic banks is ratio analysis and data envelopment analysis respectively. With
regard to banks’ performance, this study concludes that Shajalal Islami Bank limited is better
than other Islamic banks in terms of its ROA, ROE, ETA, CAR, IER and AU ratios. On the other

15
hand, with regard to banks’ efficiency, all Islamic banks have shown an improvement on their
efficiency level. However, the result shows that First Security Islami Bank is better in terms of
efficiency. This study complements other studies which discus about performance and efficiency
in Islamic banks, particularly in the case of Bangladesh

K. M. Anwarul Islam (2012) in his research showed the comparison about the performance of
Banks operating in Bangladesh. For this analysis we have used some most commonly used
measures such as general business measures, profitability measures, management soundness
measures and social profitability measures. Though, both conventional & Islamic banking have
enormous contribution to the economy they have two major functional differences. First one is
that where as the conventional banks follow borrowing and lending mechanism, the Islamic
banks follow trading and investment mechanism and neither accept nor pays interest in any of its
activities. And the other is conventional bank provide & receive interest for deposit & advance
but Islamic banks are concerned with profit in case of both deposit and investment. For
performance comparison both financial profitability & social profitability aspect of performance
have been taken into consideration. The study shows that in spite of a few exceptions in general
Islamic banks’ overall performance was better than the conventional banks. At the end, some
lines of actions were mentioned to make necessary improvements.

Rayhan, Ahmed & Mondal (2011) conducted a research study named ‘Performance Evaluation
and Competitive Analysis of State Owned Commercial Banks in Bangladesh’. The broad
objective of this study is Performance Evaluation and Competitive Analysis of state owned
commercial banks in Bangladesh. The study reveals all the state owned commercial banks in
Bangladesh are not able to achieve a stable growth, net profit, earning per Share, return on
equity, return on assets, net asset value per share but they are capable to achieve a stable growth
of deposit, loan and advances, equity. It is also observed that all of the state owned commercial
banks have high nonperforming loan/classified loan and percentage of classified loan to total
loan is very high.

16
Md. Safiullah (2010) in this paper discussed about the commercial banking system that
dominates the financial sector with limited role of non-bank financial institutions and the capital
market. The Banking sector alone accounts for a substantial share of assets of the financial
system. Commercial banks contribute significantly in the economic development through the
development of major contributory economic indicators directly or indirectly. Commercial banks
in Bangladesh operate under branding of interest-based conventional banks and interest-free
Islamic banks (based on Islamic sariah).The study emphasis on the financial performance
analysis of both stream of banks to measure superiority. The study indicates that financial
performance (business developments, profitability, liquidity and solvency, commitment to
economy and community, efficiency and productivity) of both streams of banks is notable. Study
result based on commitment to economy & community, productivity and efficiency signifies that
interest-based conventional banks are doing better performance than interest-free Islamic banks.
But performance of interest-free Islamic banks in business development, profitability, liquidity
and solvency is superior to that of interest-based conventional banks. That is comparatively
Islamic banks are superior in financial performance to that of interest-based conventional banks.

Siddique and Islam (2001) pointed out that the commercial banks, as a whole are performing
well and contributing to the economic development of the country. The average profitability of
all Bangladeshi Banks collectively was 0.09% during 1980 to 1995 which means that a profit of
Tk.0.09 was earned by utilizing assets of Tk.100 in every aspect of profit; banking sector
contributes the national economy as well as the individual organization. Despite overall growth
of the banking sector positive the performance of different categories of banks were not equally
attractive.

17
2.3 Literature Review: World Perspective.

Aida Kammoun & Daoud Yomna (2017) in their research investigates the financial
performance of the Islamic banking sectors in Tunisia from year 2010-2014. The Performance
estimates of individual banks in profitability, liquidity, risk and solvency are evaluated using the
most significant financial ratios analysis. The study assesses also the overall stability of each
bank. The descriptive statistical measurements (mean, standard deviation and coefficient of
variation) were used to classify the performance, measuring the dispersion and the variability of
these ratios.

Polycap Obote Olweny & Joshua Wanjare (2017) in their study compare the financial
condition and performance of the Islamic banks against those of the conventional banks in Kenya
along the dimensions including profitability, liquidity and solvency. The study applies
“descriptive financial analysis” research design and is longitudinal in nature spanning a period of
six years from 2010 to 2015. A sample of seven banks has been studied covering two fully
fledged Islamic banks and five non-Islamic banks under the same small peer group according to
the CBK bank supervision report of 2014. Secondary data collected from the banks’ financial
statements has been utilized in this study. The study concludes that the difference in profitability
and solvency between the Islamic banks and the conventional banks is not statistically
significant. On liquidity, however, Islamic banks have proven to be significantly better than the
Non-Islamic banks.

Shahab Aziz, Maizaitulaidawati Husin, Shujahat Haider Hashmi (2016) conducted this
study to find out financial performance of Islamic and conventional banks operating in Pakistan
for the year 2006-2014. For comparison purpose five Islamic and five similar sized conventional
banks have been selected. The comparison has been made on average values of different ratios of
both Islamic and conventional banks. The comparison shows that Islamic banks performance has
been better in terms of efficiency, return and asset quality. However Islamic banks are struggling
in terms of advances, investment, liquidity, deposits and capital as conventional banks
performance is better in these areas. Islamic banks are charging higher spread and share of
distributable income to depositors is far less as compared to conventional banks. Islamic banks
need to focus on fair distribution of profit to its depositors in order to increase its credibility and

18
help in achieving overall Islamic socio economic objectives of justice and equality. Islamic
banks should focus on new products development and innovative solutions to meet client’s
needs, also Islamic banks needs to strengthen their equity base.

Ibrahim (2015) measured the financial performance of two Islamic banks in United Arab
Emirates for the period of 2003 to 2007. the financial ratios is used to measure liquidity,
profitability, management capacity, capital structure and share performance ratios and make a
comparison between these two banks . The research evaluates also the financial stability of the
two banks. The results showed that the overall performance of both Islamic banks is satisfactory
both. Moreover, Dubai Islamic bank has better levels of profitability and liquidity its rival.
However, the analysis of four ratios of share performance reveals that Abu Dhabi bank is better
off than Dubai Islamic bank. Finally, Abu Dhabi bank had a high level of stability than Dubai
Islamic bank.

Manpreet Kaur & Jaspreet Kaur (2015) This study will helps to find out which bank is better
among leading banks and where the investors and customers should invest money into. There are
many aspects to measure the performance of banks like WACC, Regression Analysis and
CAMEL Model is one important of them and thus it is being used in study to measure and
compare the financial performance of leading five public sector banks, on the basis of total assets
and consolidated basis, in India for 5 years from 2009-2014. The banks include Bank of Baroda,
State Bank of India, Punjab National bank, Bank of India, and Canara Bank. The data is
collected from annual reports of these banks and various ratios have been calculated measuring
the aspects of CAMEL which includes capital adequacy, asset quality, management efficiency,
earning quality and liquidity. After calculating these ratios, it is found that Bank of Baroda is
leading in all the aspects of CAMEL followed by Punjab National Bank in Capital Adequacy,
Management efficiency and Earning capacity and Bank of India in Asset Quality.

Chaudhary (2014) conducted a study to measure the right performance of public and private
sector banks by the use of secondary data collected from annual reports, periodicals, website etc.
for the year 2009-2011 and found out that in every aspect private sector bank has performed
better than public sector banks and they are growing at faster pace.

19
Osama A. Hazzi & Mohamad Ihsan AL Kilani (2013) this article statistically examines the
financial performance for both of Islamic and Traditional banks in Malaysia to know whether or
not there are significant differences between such banks with respect to profitability, liquidity
and risk performance. We find that the Traditional banks are more profitable than Islamic banks,
while the latter is more liquid and less risky, especially with respect to the risk-weighted capital
ratio, than the Traditional banks. Suggestions for further studies are demonstrated in this article.

Ali, Ali & khwaja (2013) has done a Comparison of Islamic and Conventional Banking on the
Basis of Riba and Services. The Research is conducted to find out the problems of Islamic
Banking system that blocked the growth of Islamic Banks as compared to conventional Banking
System. This study present the results of research carried out mainly with people who currently
use conventional and Islamic banking and Islamic banking knowledge. In this research, they
tried to highlight some of the problems that are causing problems for the growth of Islamic
banking. The dependent variables in this research are changing in other Islamic banks, customer
satisfaction. They selected a sample size of 150 banking client (male and female) and used
descriptive and correlation analysis to analyze the relationship between customer satisfaction and
Islamic Banking Services in Peshawar. The study is based on both secondary and primary data,
150 account holders of Islamic banking were selected who were the customers of conventional
banking at the same time as well the data is secured through questionnaires, informal interviews.
It consisting of both sources of data that is, secondary as well as primary. Difficulty in this
observes is shortage of consciousness among the people concerning the Islamic Banking.

The study of Ryu, Piao and Nam (2012) finds that Islamic banks have lower risk and high profit
than traditional banks in Malaysia. They statistically assure that Islamic banking system is more
stable and sound than Traditional banking system in Malaysia. They also assert that the risk
management and prudence are embedded in Islamic finance because of its focus on the need for
transactions to be supported by underlying economic activity. They, however, attribute the
strengths of Islamic finance to Shariah (Islamic law) principle, which requires financial
transactions to be accompanied by an underlying productive economic activity.

20
Jaffar and Manarvi (2011) evaluated the performance of Islamic and conventional banks
through CAMEL test during the period of 2005 to 2009. The sample of their research is 5 Islamic
and 5 conventional banks. It is found that Islamic banks performed better and having high
liquidity than the conventional banks, moreover it is realized that conventional banks have
pioneer in the management and having a good earning ability.

Akhter et al. (2011) studied the efficiency and performance of Islamic bank in relation to two
conventional banks in Pakistan. They used the financial ratios to measure profitability, liquidity
risk and credit risk for the years 2006-2010. The results showed that no significant difference is
observed between the two types of banks in respect of profitability and a divergence in liquidity
and credit performance..

The study of Rashwan (2012) also tests the financial performance for both of Islamic and
Traditional banks pre and post 2008 financial crisis. They find that there is a significant
difference between IBs and TBs in 2007 and 2009, while there are no significant differences in
2008. Their study indicates that the crisis hit both banking sectors alike, but the Islamic banks
outperform their counterparts in 2007, while the Traditional banks perform better in 2009 when
the crisis effect starts reach the real economy, which in turn is the only way of investment for
Islamic banks.

Majid, S. Saal & Battisti (2012) examining efficiency in Islamic and conventional banking: An
international comparison. The paper investigates the efficiency of a sample of Islamic and
conventional banks in 10 countries that operate Islamic banking for the period 1996 to 2002,
using an output distance function approach. This study employs an output distance function to
examine the efficiency and returns to scale of Islamic banks relative to conventional banks in
countries that have Islamic banks, namely Malaysia, Sudan, Bangladesh, Tunisia, Jordan,
Lebanon, Yemen, Indonesia, Bahrain and Iran for the period 1996-2002. We finally note that on
average, the banks in each of the 10 sample countries exhibit moderate returns to scale.
However, the average estimated returns to scale for conventional banks are lower than those for
Islamic banks, with the exception of Malaysia and Jordan. However, while this result suggests
that Islamic banks will benefit more from increased scale than conventional banks, the average

21
scale economy estimate of 1.052 for all Islamic banks indicates that only moderate gains will be
achieved even if Islamic banks strive to increase their scale size.

Saleh and Zeitun (2006) in order to evaluate the Islamic banks’ performance in Jordon examine
and analyze the experience of two Islamic banks, Jordan Islamic Bank for Finance and
Investment (JIBFI), and Islamic International Arab Bank (IIAB). The research reveals that the
efficiency of both banks has increased and they have played an important role in financing
projects in Jordan. Also, the Bank for Finance and Investment (JIBFI) is found to have high
profitability. The study concludes that Islamic banks have great development in the credit
facilities and in profitability.

The study of Samad (2004) also examines the financial performances of Islamic and Traditional
banks in Bahrain, especially, after the first Gulf War and it concludes that there is no major
difference in performance between Islamic and conventional banks with respect to profitability
and liquidity. But, it finds that there exists a significant difference in credit performance, which
Islamic banks are exposed to less credit risk compared to Traditional banks.

The study of Rosly and Abu Bakr (2003) also test the performance of Islamic banks and
Traditional banks in Malaysia. Although, they record that return on assets (ROA) is higher in
Islamic banks, but this does not imply higher efficiency. They confirm that Islamic banks that
thrive on interest-like products (credit finance) are less likely to outshine Traditional banks on
efficiency terms.

The study of Samad and Hassan (1999) applies the financial ratios analysis to test the financial
performance between a Malaysian Islamic bank, which represents in Bank Islam Malaysia
Berhad (BIMB), and a group of eight Traditional banks in Malaysia. They, however, conclude
that Islamic bank is relatively more liquid and less risky than the selected group of Traditional
banks. They also find that bankers' lack of knowledge is the main reason for slow growth of
financing under profit sharing performance measure. Through the comparison of Islamic bank
and the group of eight conventional banks, they also reveal that there is no difference in
economic participation.

22
2.4 Chapter Concluding

All the above studies have made substantial contributions to the understanding of different
aspects of the financial performance of the bank’s industry in general and Bangladesh's
perspective in particular. From the literature review, it is observed that the financial performance
of a bank is influenced by numerous financial variables. Some key factors are common
phenomena all over the world and across all the banks. No comprehensive research work has
been conducted on the different aspects of the financial performance of banks and their practices
in the context of Bangladesh. The fact is that many important aspects of the financial
performance of banks deserved to be studied comprehensively. The present study investigates
possible all aspects of the financial performance of banks in Bangladesh. Extensive analysis of
the previous literature, practices, and theories provides the research gap and is the main basis of
the study. Thus, this study is expected to be an enriching work on the financial performance of
the bank’s industry in Bangladesh.

23
 CHAPTER: 03
RESEARCH
METHODOLOGY

24
3.1 Introduction

The chapter provides a detailed direction about methods to be employed to test the financial
performance of bank industry in Bangladesh. This is the attempt to select the appropriate sample
that actually represents population. The research method determines the suitable roadmap of
research as process of techniques to be used in conducting the research. The study has
investigated the existing knowledge on the relevant literatures and adopted the methodology
accordingly. This is to make the clear about understanding of what methodology is actually
suitable for this study. This part of the paper deals with descriptive statistics, correlation analysis
and regression analysis performed to establish the relationship between the explanatory variables
and dependent variable.

3.2 Model Specification

To examine the relationship between the performance of bank industry and the set of internal and
external banking characteristics, we formulate a formal model reflecting the relationship between
bank performance and bank’s internal and external indicators. Since the ultimate objective of
management is to maximize the value of the shareholder’s equity, an optimal mix of returns and
risk exposure should be pursued in order to increase the profitability of the bank. Hence, a
comprehensive plan to identify objectives, goals, budgets, and strategies should be developed by
the bank management. The operating efficiency and profitability measures used as criteria for
performance are specified below. Whereas capital ratios, leverage, overhead, loan and liquidity
ratios, and foreign ownership are used as proxies for the bank’s internal measures,
macroeconomic indicators, taxation, financial structure, and country dummies are used to
represent the external measures. A linear equation, relating the performance measures to a
variety of financial indicators is specified. The subsequent regression analysis starts from
estimating the following basic equation:

ROE = 𝜶 + β1LogA + β2CA + β3IA + β4NPI + β5DP + β6NPM + β8IGSEC+ β9OI + 𝝐

25
3.3 Variable description

Dependent Variables: we have chosen different measures of profitability as dependent

variables. Return on equity (ROE). Return on equity (ROE) explains the return against the book
value of the shareholders .ROE expresses management efficiency in shareholders fund
management.

Return on Equity (ROE): Return on Equity is equal to Net Income over the Total Equity of the
bank. This ratio is an indicator of bank profitability in terms of management of shareholder’s
Equity. According to these ratio bank managers understand how well they are utilizing Equity to
generate profit. It indicates how profitable a bank is from every unit of capital invested by
shareholders.

Independent Variables: We have taken eight independent variables as potential determinants of

conventional commercial banks. All the determinants are bank specific or internal. These
explanatory variables work as a proxy of earnings, liquidity, management efficiency, asset
quality and capital strength.

Bank Size:

In general, the bank size is determined by its Total Assets. The larger the bank size leads to more
profit; however, they argued that if a bank has an extravagant size of asset, this may make a
negative impact on profitability of banks. Since the total Assets are all in different level of
numbers, using logarithm of the bank size (Log Size) is necessary to run regression analysis.

Capital Adequacy (CAR):

Capital adequacy ratio (capital to risk weighted assets ratio) is equal to equity divided by Total
assets. This ratio shows a bank’s capital to its risk. In other words, according to Capital
Adequacy, it is estimated that how well bank is able to protect its depositors and lenders from
bank failure. Therefore, if bankers manage banks in terms of Capital Adequacy properly, it
brings stability and efficiency to banks position.

26
Asset Quality (ASQ):

This ratio is calculated by division of Total Loan, Advances, and Financing to Total Assets. This
ratio expresses that how much of assets are utilized as loans. Since loan is most important and
main source of earning for banks, they are more interested to make loan for borrowers. However,
it makes high degree of risks to banks.

Deposit:

This ratio is calculated by total deposit divided by total asset. It measures the magnitude of assets
being funded by public deposits. It is also indicates the deposit to asset ratio tests whether banks
that have more deposits incur additional operating costs to attract deposits.

Income Expenditure Structure

It is measured by net profit margin. Net Profit Margin is calculated by Net Profit income divided
by total assets. It is indicates how much net income or profit is generated as a percentage of
revenue.

Investment Activities

This ratio is calculated by division of investment in government securities & other investment
calculated by total asset. It indicates how much a organization is invested in government and
other securities.

27
Table-01: Variables

Description Variable Measure Notation

Dependent Profitability Return on Equity ROE
Variable (ROE) = Net
Profit/Total Equity
Independent Asset Size Natural Logarithm Log A
Variables of Total Assets
Capital Adequacy Equity/Total Asset CA

Asset Quality Investment/Total IA

Assets
Non Performing NPI
Investment/Total
Investment
Deposit Deposits/Total DP
Assets
Income Expenditure Net Profit Margin = NPM
Structure Net Profit Income/
Total Assets
Investment Investment in Govt. IGSEC
Activities securities/Total
Assets
Other OI
Investment/Total
Assets

3.4 Method

The study investigates determinants the performance of bank industry in Bangladesh by

exploring the internal and external factors of banks profitability. We employ multiple regression
analysis to capture significant determinants of profitability and to test hypothesis. Under the
multiple regression analysis, we run descriptive statistics i.e. maximum, minimum, mean and
standard deviation of each variable. The correlation matrix represents which determinants are
significant. Again ANOVA table and regression analysis are used to identity which of these
variable affect the performance of bank industry.

28
Chapter: 04
Analysis &
Descriptions

29
4.1 Introduction
In this chapter we analyze the data we get from bank’s financial statement. To analyze bank
industries financial performance we use various techniques such as descriptive statistics, Pearson
correlation and regression analysis to interpret the data.

4.2 Determinants of the Bank industry’s Performance:

In this section we will try to analyze the data and present the result in various segments such as
descriptive statistics correlation matrix among the variables and finally we will fit a regression
model which will give us the appropriate result about the research.

4.3 Descriptive Statistics

Descriptive statistics are used to describe the characteristics of data set. The descriptive statistics
are important for using all normative of causes and effects including hypothesis testing,
correlation, and regression analysis. Unless those techniques are entirely grasped, data can be
easily misinterpreted and consequently distorted.
Table- 2: Descriptive statistics of the variables
Variables Type Minimum Maximum Mean Standard
Deviation
ROE Islamic 0.063872 0.239084 0.116882 0.011578
Conventional 0.000809 0.213193 0.108524 0.048869
Size Islamic 25.46964 27.76336 26.35484 0.027701
Conventional 25.25374 26.69034 26.07883 0.369859
CA Islamic 0.050054 0.105521 0.074406 0.00348
Conventional 0.052403 0.116863 0.074646 0.016575
IA Islamic 0.660134 0.822205 0.740411 0.04062
Conventional 0.082809 0.254402 0.134191 0.037558
NPI Islamic 0.008397 0.066365 0.031036 0.012225
Conventional 0.056156 1.646408 0.227784 0.253912
DP Islamic 0.699336 0.865933 0.812703 0.03928
Conventional 0.192081 0.840252 0.739048 0.13023
NPM Islamic 0.004173 0.019213 0.008764 0.014991
Conventional 0.000057 0.016264 0.008069 0.003893
IGSEC Islamic 0.019537 0.149345 0.042786 0.618455
Conventional 0.076887 0.236333 0.116069 0.034442
OI Islamic 0.0000654 0.048193 0.015529 0.037645
Conventional 0.000934 0.039973 0.018122 0.010401
Source: Data have been compiled by the researcher using annual reports (2012-2019)

30
The table presents the number of sample, minimum, maximum, mean value and standard
deviation of collected data. The minimum and maximum value of ROE in Islamic banks is
0.063872 and 0.239084 which is greater than conventional bank’s minimum & maximum value
which is 0.000809 and 0.213193, Conventional banks also have greater risk in investment than
Islamic banks because of their higher standard deviation than Islamic banks. The larger the bank
size leads to more profit in that case Islamic banks are more profitable than conventional banks
and the variation in size is also lower than conventional banks. Capital adequacy indicates that
how much capital on reserve to handle a certain amount of losses, before being at risk for
becoming insolvent. So, in that case conventional banks has greater amount of reserve than
Islamic banks, though standard deviation of conventional banks in capital adequacy ratio is
higher than Islamic banks. The asset quality rating reflects the quantity of existing and potential
credit risk associated with the loan and investment portfolios, Islamic banks has higher asset
quality ratio then conventional banks and standard deviation of Islamic and conventional banks
in asset quality is 0.04062, 0.037558. This indicates Islamic banks have greater risk than
conventional banks. Nonperforming loan in conventional banks is higher than Islamic banks,
which makes conventional banks default risk higher than Islamic banks. Higher deposit ratio
indicates banks have able to attract higher public deposit in that case Islamic banks are far ahead
of conventional banks. Income expenditures structure is measured by profit margin ratio. The
higher the ratio of profit margin the higher the bank is profitable; Islamic and conventional banks
minimum and maximum value of net profit margin is 0.004173, 0.019213 and 0.000057,
0.016264 respectively. So, the Islamic banks are more profitable than conventional banks. The
minimum, maximum and mean of investment activities of conventional banks in government
securities are 0.076887, 0.236333 and 0.042786. The minimum, maximum and mean of
investment activities of Islamic banks in government securities are 0.019537, 0.149345 and
0.042786. From above comparison we have seen that conventional banks have more investment
in government securities than Islamic banks. Islamic banks also have less investment in other
securities than conventional banks.

31
4.4 Correlation Analysis
The study uses the Pearson correlation analysis to understand the association between the
determinants of financial performance. The maximum previous researches have shown the
Pearson correlation analysis before conducting the regression analysis. The testing results of
Pearson correlation are summarized as below:
Table-3: Correlation (Pearson) Matrix among variables (Conventional Banks)
Variables ROE Size CA IA NPI DP NPM IGSEC OI

ROE 1

Size -0.36103 1

CA -0.04038 0.023636 1

IA -0.2702 -0.55024 -0.16503 1

NPI -0.46384 0.394977 -0.14127 -0.1111 1

DP -0.16042 -0.02245 -0.05854 0.1933 -0.0266 1

NPM 0.859079 -0.32711 0.46638 -0.2812 -0.4694 -0.15493 1

IGSEC -0.18053 -0.5009 -0.26182 0.9619 -0.1544 0.15201 -0.2497 1

OI -0.37785 -0.32818 0.27107 0.4256 0.11037 0.194652 -0.1886 0.16205 1

Source: Data have been compiled by the researcher using annual reports (2012-2019)

32
The table indicates the result obtained from Pearson correlation analysis showing the relationship
ROE with bank size, risk, profitability, investment, liquidity, nonperforming loan and deposit
rate. Only net profit margin ratio display positive relationship with ROE with coefficient of
0.859079. The results indicates the increase in value of net profit margin have increase in ROE
and vice-versa. The capital adequacy, bank size, investment, nonperforming loan, deposit rate
demonstrate the negatively significant relationship with ROE with the coefficient of -0.04038, -
0.36103, -0.37785, -0.18053, -0.46384, -0.2702 and -0.16042. The increase in these variables
decreases the ROE ratio and vice-versa. There exists the strong relationship between capital
adequacy-size, nonperforming investment-size, deposit rate-Asset quality, net profit margin-
capital adequacy, Investment-asset quality and the remaining shows the weak relationship.
Table-4: Correlation (Pearson) Matrix among variables (Islamic Banks)
Variables ROE Size CA IA NPI DP NPM IGSEC OI

ROE 1

Size -0.29359 1

CA 0.030642 -0.72791 1

IA -0.36993 0.67608 -0.5778 1

NPI -0.18644 0.20768 -0.21399 0.16181 1

DP -0.14043 0.4019 -0.13478 0.21620 -0.14897 1

NPM 0.54653 -0.62753 0.544368 -0.53532 -0.37426 -0.12877 1

IGSEC -0.32400 0.46498 -0.08271 -0.01783 0.104222 0.34542 -0.2495 1

OI -0.06724 -0.45702 0.49975 -0.25260 0.133297 -0.62471 0.01986 -0.25586 1

Source: Data have been compiled by the researcher using annual reports (2012-2019)

33
The table indicates the result obtained from Pearson correlation analysis showing the relationship
ROE with bank size, risk, profitability, investment, liquidity, nonperforming loan and deposit
rate. Only Capital Adequacy and Net Profit Margin ratio display positive relationship with ROE
with coefficient of 0.030642 and 0.54653. The results indicate the increase in value of Capital
Adequacy and Net Profit Margin has increase in ROE and vice-versa. The bank size, investment,
nonperforming loan, deposit rate demonstrate the negatively significant relationship with ROE
with the coefficient of -0.29359, -0.36993, -0.18644, -0.14043, -0.32400 and -0.06724. The
increase in these variables decreases the ROE ratio and vice-versa. There exists the strong
relationship between size-asset quality, nonperforming investment-size, deposit rate-Asset
quality, net profit margin-capital adequacy, Investment-nonperforming investment and the
remaining shows the weak relationship.

34
4.5 Test of Random Effects Model
The relationship between ROE and determinants is to be tested by the panel techniques of
Random effects Model. The estimated results of random effects model are presented below:

Table-5: Estimated results of Random Affect Model (Conventional Banks)

Variables Random Affect Model
Co-efficient Std. Error t-statistic p-value
Constant 0.210963 0.10321 2.04394 0.04926

Size -0.00261 0.00385 -0.6765 0.50357

CA -1.66235 0.07045 -23.596 0.000083

IA -0.10311 0.03352 -3.0759 0.00428

NPI -0.00818 0.00398 -2.0574 0.04787

DP -0.00594 0.00662 -0.8969 0.37648

NPM 13.47052 0.37369 36.0469 0.000075

IGSEC 0.032217 0.024306 1.325474 0.1853

OI 0.058211 0.11194 0.52005 0.60661

R-Square 0.990875
Adjusted R-Square 0.957629
F-Statistics 496.4
Prob. (F-statistics) 0.000016

Source: Data have been compiled by the researcher using annual reports (2012-2019)
The table 5 shows the results of random effects model indicating the relationship between ROE
and determinants. The asset size shows the insignificant effect on ROE with the coefficient of -
0.00261 signifying that the ROE tend to goes down if the asset size increases. Capital adequacy
ratio is statistically significant with ROE and the coefficient of this variable highly negative that

35
indicates if the bank uses more equity than ROE will goes down. Asset quality is statistically
significant with ROE and coefficient of this variable negative that indicates if the bank invests
more money on asset the ROE will goes down. Nonperforming investment has insignificant
effect on ROE with the coefficient of -0.00818 signifying that the ROE will go down if NPI
increases. Deposit rate is statistically insignificant and also negatively correlated with ROE. Net
Profit Margin is statistically significant with a co-efficient of 13.47052 which indicates if the
NPM increases ROE also increases. Investment in government securities and investment in other
asset are statistically significant and positively correlated with ROE. Model statistic shows that
the model can explain 99.09 percent of variation of ROE ratio by R-squared and adjusted R-
squared. P-value of F-statistic is below 0.05.
Table-6: Estimated results of Random Affect Model (Islamic Banks)
Variables Random Affect Model
Co-efficient Std. Error t-statistic p-value
Constant 0.044122 0.433729 0.101728 0.919628

Size 0.015128 0.018554 0.815328 0.421105

CA -1.195821 0.654757 -1.82636 0.077441

IA -0.441268 0.192281 -2.29491 0.028668

NPI 0.005082 0.425935 0.011931 0.990557

DP 0.051536 0.178703 0.288389 0.774969

NPM 6.936949 2.124586 3.265083 0.002671

IGSEC -0.433289 0.249737 -1.73498 0.092678

OI 0.351851 0.734418 0.479088 0.635238

R-Square 0.521169
Adjusted R-Square 0.397600
F-Statistics 4.217631
Prob. (F-statistics) 0.001649

Source: Data have been compiled by the researcher using annual reports (2012-2019)

36
The table 5 shows the results of random effects model indicating the relationship between ROE
and determinants. The asset size shows the insignificant effect on ROE with the coefficient of
0.015128 signifying that the ROE tend to goes up if the asset size increases. Capital adequacy
ratio is statistically insignificant with ROE and the coefficient of this variable highly negative
that indicates if the bank uses more equity than ROE will goes down. Asset quality is statistically
significant at 5 percent level with ROE and coefficient of this variable negative that indicates if
the bank invests more money on asset the ROE will goes down. Nonperforming investment has
insignificant effect on ROE with the coefficient of 0.005082. Deposit rate is statistically
insignificant and also positively correlated with ROE with a co-efficient of 0.051536. Net Profit
Margin is statistically significant with a co-efficient of 6.936949 which indicates if the NPM
increases ROE also increases. Investment in government securities is statistically insignificant
and negatively correlated with ROE. Investment in other asset is statistically insignificant and
positively correlated with ROE. Model statistic shows that the model can explain 52.12 percent
of variation of ROE ratio by R-squared and adjusted R-squared. P-value of F-statistic is below
0.05.

37
 Chapter: 05
Conclusion and
Recommendations

38
5.1 Conclusion
Our findings showed that Islamic banks were the dominant in the banking industry based on
profitability and market share. The study examined the determinants of bank industry in
Bangladesh using data obtained from financial statement of the respective bank. We examined
the data for the year of 2012 to 2019 of five Islamic and five conventional banks. Our study
revealed that the interest income was the main income of the bank and asset size did not have a
significant effect on profitability. It indicated that profitability influenced by greater
diversification of banking activities. Our study also revealed that a higher investment of a
Islamic bank helped to achieve the more profitability.
The banking sector of Bangladesh has undergone noteworthy financial reforms, which has
significantly transformed the sector. At present Islamic banks are dominant in respect of market
share and profitability in this sector. Profitability is always an important criterion to measure the
performance of banks. This study examined the determinants of bank industries profitability in
Bangladesh by using the data obtained from the financial statements of five Islamic and five
conventional banks for the year 2012 to 2019. The study identified that asset size had no
significant effect on profitability. NPM is always considered to be the main source of income of
a bank. But the most significant variable which affected the profitability was found to be the
Asset quality. This indicated that greater diversification in banking activities positively
influenced profitability. It was also identified that investment activities, mainly in shares and
debentures (quoted and unquoted) of private sectors had a positive impact on ROE but not
significant. It suggested that banks which were more exposed to the capital market or invest
higher proportion of funds in unquoted shares and debenture might be achieved higher
profitability. The findings of this study have considerable policy relevance. It could be argued
that the more profitable bank will be able to offer more new products and services. The role of
diversified banking activities is particularly important, given that a bank with relatively more
innovative ideas and better fund management capability may have added advantage over its
peers. As per the portfolio theory diversification reduces risks, so various sources of earning
should be welcomed. But if this earning includes higher proportion of volatile trading activity
rather than low risk income streams like fees and commission, the risk may become higher. In
our study it was observed that higher proportion of investment activities (other than the
government securities) could help to achieve higher level of profitability, so a bank may have
tendency to increase its exposure to the capital market. More exposure in the capital market may
bring more risk to a bank as the investment decision in the developing capital market like
Bangladesh depends mostly on speculation rather than the real financial indicators. It suggested
that non-traditional activates of banks (other than deposit taking and lending) might lead banks to
higher exposure to the risk. So the ability to maximize risk adjusted returns and sustaining stable
and competitive returns is an important element in the banking business. Thus, from the
regulatory perspective, risk management should be the key focus. In this regard, capital adequacy
should be emphasized so that banks are able to withstand any negative shock. Ring-fencing

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traditional banking from investment banking and putting limit on the exposure to risk taking
investment activities can be one of the way to minimize the risk. The risk taking investment
activities also should be monitored very closely by the supervisor. Banks profitability is expected
to be sensitive to macroeconomic variables such as Gross Domestic Product rate (GDP), inflation
rate (INF) and real interest rate (RI). Due to limited data availability and time constraints, those
external variables have not been included in this study. There is also scope to analyze the linkage
between the bank’s profitability and their exposure to the capital market more intensively.
Another potential important aspect is to analyze the determinants of profitability by a panel
dataset.

5.2 Recommendations
The finding of the study has considerable policy relevance. So, 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 robustness as well as stability of the banking sector.
Capital adequacy should be emphasized so that banks are able to withstand any negative shock
.The risk-taking investment activities also should be monitored very closely by the supervisor.
Bank should employ appropriate mechanisms to screen, monitor and forecast future levels of risk
to increase bank profitability.

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