Thesis Kamal Sah, GoldenGate

RELATIONSHIP BETWEEN MACROECONOMIC
VARIABLES ON SELECTED COMMERCIAL BANKS’

PROFITABILITY OF NEPAL
Submitted by:
KAMAL SAH
GOLDENGATE INTERNATIONAL COLLEGE
2nd Year Exam Roll No: 4530004
T.U. Reg. No: 7-2-361-105-2009
A Thesis Submitted to:

Office of Dean
Faculty of Management
Tribhuvan University
IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE

DEGREE OF MASTER'S DEGREE IN BUSINESS STUDIES (MBS)
Kathmandu, Nepal
December 24, 2017
RECOMMENDATION
i
VIVA-VOCE SHEET
ii
Acknowledgements
This Dissertation entailed “Relationship Between Macroeconomic Variables on Selected
Commercial Banks’ Profitability of Nepal” has been prepared in partial fulfillment for the Masters
of Business Studies (MBS) under the Faculty of management, Tribhuvan university.
It is my privilege of getting helps and co-operation from different persons. It is not possible to
enumerate the names of all of them. However, it will be matter of injustice if I forget the names of
those personalities whose valuable suggestions and co-operation motivated to complete this thesis.
First and foremost, I would like to offer special thanks to my all teachers, who taught me up to now.
I would like to pay my sincere thanks to my thesis supervisor Mr. Bivab Neupane for incessant
suggestion and guidance from the beginning to the end is really appreciable effort. Their valuable
support for the preparation of proposal to completion of thesis is really praise worthy thing. I am
extremely indebted to their valuable contribution despite of their busy schedule.
Finally, I would like to extend thanks to my family members, my relatives and friends who assisted
me in different ways with their unconditional consistent support and encouragement in every step of
my thesis work.
Kamal Sah
2017
iii
Declaration
I, hereby declared that the work reported in this thesis entitled “Relationship Between
Macroeconomic Variables on Selected Commercial Banks’ Profitability of Nepal” submitted to
office of the Dean, Faculty of Management, Tribhuvan University, is my original work done in the
form of partial fulfillment of the requirement for the degree of Master of Business Studies (MBS)
under the supervision of Mr. Bivab Neupane, Research Committee, GoldenGate International
College, T.U.
December 24, 2017
................................................
Kamal Sah
GoldenGate International College
2nd Year Exam Roll No: 4530004
T.U. Reg. No: 7-2-361-105-2009
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TABLE OF CONTENT
Recommendation i
Viva-Voce Sheet ii
Acknowledgements iii
Declaration iv
Table of Content v
List of Tables vi
List of Figures vii
Abbreviations viii
CHAPTER I : INTRODUCTION.....................................................................................................1
1.1 Background of the Study..............................................................................................................1
1.2 Statement of the Problem.............................................................................................................2
1.3 Objectives of the Study................................................................................................................3
1.4 Significance of the Study.............................................................................................................4
1.5 Research Hypothesis....................................................................................................................5
1.6 Limitation of the Study................................................................................................................5
1.7 Operational Definitions................................................................................................................5
1.8 Organization of Study..................................................................................................................6
CHAPTER II : REVIEW OF LITERATURE AND THEORETICAL FRAMEWORK...........7

2.1 Review of Literature....................................................................................................................7
2.2 Research Gap.............................................................................................................................13
2.3 Theoretical Framework..............................................................................................................14
2.3.1 Dependent Variables.............................................................................................................16
2.3.2 Independent Variables..........................................................................................................16
CHAPTER III : RESEARCH METHODOLOGY.......................................................................18

3.1 Research Design.........................................................................................................................18
3.2 Sample Size Determination........................................................................................................18
3.3 Data Collection Procedures........................................................................................................19
3.4 Instrumentation of Data..............................................................................................................19
3.5 Validity and Reliability..............................................................................................................20
3.6 Data Analysis Methods..............................................................................................................20
CHAPTER IV : PRESENTATION AND ANALYSIS OF DATA..............................................21

4.1 Trend Analysis...........................................................................................................................21
4.2 Correlation Analysis...................................................................................................................23
4.3 Multiple Regression Analysis....................................................................................................26
4.4 Summary of Hypothesis Testing................................................................................................40
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CHAPTER V : SUMMARY, CONCLUSION AND RECOMMENDATIONS.........................43
5.1 Summary of Findings.................................................................................................................43
5.1.1 Findings of relationship between GDP and Profitability......................................................43
5.1.2 Findings of relationship between Inflation and Profitability................................................43
5.1.3 Findings of relationship between Exchange rate and Profitability.......................................44
5.1.4 Findings of relationship between Interest rate and Profitability...........................................44
5.2 Conclusion..................................................................................................................................44
5.3 Recommendations......................................................................................................................46
REFERENCES
ANNEX
vi
LIST OF TABLES
Table 1: Sampling of Banks...............................................................................................................19

Table 2 : Correlation Analysis: Macroeconomic variables and ROA of banks.................................24
Table 3: Correlation Analysis: Macroeconomic variables and ROE of banks...................................25
Table 4: NBL’s profitability as measured by ROA and Macroeconomic factors..............................27
Table 5: NBL’s profitability as measured by ROE and Macroeconomic factors...............................29
Table 6: NBL’s profitability as measured by ROA and Macroeconomic factors..............................31
Table 7: NBL’s profitability as measured by ROE and Macroeconomic factors...............................34
Table 8: NCC Bank Limited’s profitability as measured by ROA and Macroeconomic factors.......36
Table 9: NCC Bank Limited’s profitability as measured by ROE and Macroeconomic factors.......38
Table 10: Summary of Hypothesis Testing Based on ROA...............................................................40
Table 11: Summary of Hypothesis Testing Based on ROE...............................................................41
LIST OF FIGURES
Figure 1: Theoretical Framework.......................................................................................................15

Figure 2: Trend of Independent Variables (2006-2015).....................................................................21
Figure 3: Trend of ROA of NBL, NABIL and NCC (2006-2015).....................................................22
Figure 4: Trend of ROE of NBL, NABIL and NCC (2006-2015).....................................................23
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ABBREVIATIONS
GDP : Gross Domestic Product
EM : Equity Multiplier
JV : Joint Venture
LN : Natural Logarithm
NABIL : Nabil Bank Limited
NBL : Nepal Bank Limited
NCC : Nepal Credit and Commerce Bank Limited
NIM : Net Interest Margin
NRB : Nepal Rastra Bank
OLS : Ordinary Least Square
POLS : Pooled Ordinary Least Square
ROA : Return on Assets
ROCE : Return on Capital Employed
ROE : Return on Equity
VIF : Variance Influencing Factor
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CHAPTER I
INTRODUCTION
1.1 Background of the Study

Financial institutions like banks play a very important role. The better functioning of
these financial institutions especially commercial banks plays an effective role in the
development of the economy. Banking sectors are the backbone of a country’s economy.
A bank is a firm that takes deposits from households and firms and makes loans to other
household and firms.
The functions of commercial banks channelize the available resources in the needed
sector. Commercial bank accepts deposits and creates credit and also investment
opportunities. Credit creation leads to investment opportunities for the people and these
investments will lead to employment generation for the nation and revenue collection in
terms of interest and non-interest income for the commercial banks. It mobilizes the
collected idle fund and invests it in productive sectors which lead to the overall economic
development. The Nepalese economy has seen a mushrooming growth of financial
institutions in the last few decades. There are large numbers of financial intermediaries in
the market who are always competing against each other. Each and every one of them is
trying to increase their revenue and profitability. The sources of revenue for financial
intermediaries are interest earned from loans, commissions, fees and charges etc. Since,
the level of competition is very high in the market; the financial institutions try to provide
loans even if it increases the risk of the organization.
Profitability is essential for a bank to maintain the activity and for its shareholders to
obtain deserving returns. Therefore, banks management, regulators are attracted and
concerned about the profitability of banking sector. Determinants of bank profitability
can be split between those that are internal and those that are external. Internal
determinants are influenced by the banks management decisions and policy objectives.
Management effects are the result of differences in bank management objectives,
policies, decisions and actions in differences in bank operating results, including
profitability.
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External determinants are those events which are outside the influence of the bank. The
external determinants can also be said as “Macro economic factors”. As financial
intermediaries, banks play a crucial role in the operations of most economies; the
efficiency of these banks can affect economic growth. Also, bank insolvencies can result
in systematic crisis. So, the determinants of profitability of bank are important. While
internal factors are mostly monitored and scrutinized by the banks, the external factors
might be overlooked. In this regard, it is important to understand the actual relationship
of such external or macroeconomic factors with bank profitability.
1.2 Statement of the Problem

Banking is considered as a service industry. In the process of conducting its own
activities to achieve its own goals, i.e. making profit, it deals with many internal and
external factors that either hampers or helps this very goal. While internal factors are
mostly monitored and scrutinized by the banks, the external factors might be overlooked.
In this regard, it is important to understand the actual relationship of such external or
macroeconomic factors with bank profitability.
Internal determinants are influenced by the banks management decisions and policy
objectives. Internal determinants include products, pricing, placement, promotion,
employee performance, management styles, etc. Management effects are the result of
differences in bank management objectives, policies, decisions and actions in differences
in bank operating results, including profitability.
External determinants are concerned with those factors which are not influenced by
specific banks policies and decisions. But these are those events which are outside the
influence of the bank. The external determinants can also be said as “Macro economic
factors”. As financial intermediaries, banks play a crucial role in the operations of most
economies; the efficiency of these banks can affect economic growth. Also, bank
insolvencies can result in systematic crisis. So, the determinants of profitability of bank
are important.
In the context of Nepal, while internal factors are mostly monitored and scrutinized by
banks, the external factors might not be a priority for bankers. There has not been much
study published in terms of Nepal and its banks that focus on the effects of external
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factors, specifically macroeconomic factors. It is important to see the effects of such
economic factors so that banks and financial institutions can better prepare themselves to
equip against volatile macroeconomic variables.
The most common external factors that have been identified by previous researchers
include competition/market share/firm size, exchange rate, inflation, GDP, and interest
rate. Among these, the macroeconomic factors that are beyond the touch of individual
firms are GDP, inflation rate, interest rate and exchange rate. If a relationship does exist
between these macroeconomic variables and profitability variables of banks, it would
mean that banks would have to strategize new ways to adapt to these variables and
maximize their profits.
With Nepal’s unique economic makeup of pegged exchange rate system, high inflation
rates, and a remittance based economy, it is a novel to see the relationship of such factors
on selected commercial banks' profitability of Nepal. There are various studies conducted
for the same in other part of the world, but we could not locate any study conducted in
the Nepalese context. It is important to understand the effects of macroeconomic
variables of profitability of banks in order for banks to identify ways to maximizing their
profits in future.
Hence, the problem statement of this research is as follows:
 Is there a relationship between the macroeconomic factors of Nepal (real GDP,

inflation rate, exchange rate and interest rate) and the profitability of commercial
banks of Nepal?
 If there is any relationship, what type of relationship is this?
1.3 Objectives of the Study

The main objective of this study is to analyses the effect of macroeconomic factors on
commercial banks profitability in Nepal. The other objectives of this study will be spelled
out as:
 To test the effect of economic growth, inflation, exchange rate, and inflation rate
on bank profitability.
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 To examine if macroeconomic factors had different relations on different types of
commercial banks’ profitability.
1.4 Rationale of the Study

Financial sector plays an effective role in the development of an economy. An important
component of the financial sector is commercial banks, whose performance and
profitability have direct relations to the shareholders, regulators, employees and
customers. Generally, higher profits are expected by all stakeholders. Bank profitability is
determined by two forces: internal and external. Internal forces are those variables which
can be directly manipulated by the banks through their practices and policies. External
forces, or macroeconomic factors, are those which cannot be manipulated by the banks
and are outside of reach of the banks.
This study has explored the relationship between the macroeconomic factors and
commercial bank profitability. The results of this study bears significance to the not only
commercial banks and their shareholders, but regulators like Nepal Rastra Bank and
government and future researchers we well.
There has not been any such study published in terms of Nepal and its banks. The results
are useful to bankers to see the effects of such economic factors on the profitability of
their firms. Banks should be able to position their products more effectively using the
relationship established through this research. Further, the results can better prepare the
banks to equip against volatile macroeconomic variables so that there are less negative
impacts on their profitability.
The results of the study are also a good tool for regulators to shape policies that are bank
friendly. The regulators such as Nepal Rastra Bank and Ministry of Finance can help
increase the profitability of banks by promoting the variables that have positive
relationship with bank profitability and demoting the ones with negative relationships.
This in turn would help the economy of the country.
Further, the study also contributes to the existing literature of relationship between
macroeconomic factors and profitability. The study can help other researchers in future
who want to understand the relationship between macroeconomic factors and
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profitability. It adds to the knowledge of researchers working on understanding Nepalese
banking profitability determinants. On the other hand, the study can also be seen as a case
study by foreign researchers as it is a novel to see the relationship of macroeconomic
variables on selected banks' profitability, with Nepal’s unique economic makeup of
pegged exchange rate system, high inflation rates, and a remittance based economy.
1.5 Research Hypothesis

The study will focus on the following hypothesis:
 Hypothesis relating to real GDP and profitability of Nepalese banks.
Ho1: There is no significant relationship between profitability of banks and real GDP
 Hypothesis relating to inflation rate and profitability of Nepalese banks.
Ho2: There is no significant relationship between profitability of banks and inflation
rate
 Hypothesis relating to exchange rate and profitability of Nepalese banks.
Ho3: There is no significant relationship between profitability of banks and exchange
rate
 Hypothesis relating to interest rate and profitability of Nepalese banks.
Ho4: There is no significant relationship between profitability of banks and interest
rate
1.6 Limitation of the Study

This study may not be taken as the ultimate solution to the issue being discussed as it
possesses few limitations. Though the study is intended to have high importance, the
study also suffers from the following limitations:
 Only three banks have been selected for the study. This weakens the generalizations
capacity of the research.
 No time series test or time series properties of data have been conducted.
1.7 Operational Definitions

i) Return on Equity (ROE): It is the amount of net income returned as a percentage of
shareholders’ equity. It measures a bank’s profitability by revealing how much profit a
company generates with the money shareholders have invested. (Investopedia, 2016)
5
ii) Return on Assets (ROA): It is an indicator of how profitable a company is relative to
its total assets. It is calculated by dividing a company’s annual earnings by its total assets
and is displayed as a percentage. (Investopedia, 2016)
iii) Inflation: Inflation is measured by the consumer price index and reflects the annual
percentage change in the cost to the average consumer of acquiring a basket of goods and
services that may be fixed or changed at specified intervals, such as yearly (World
development indicators, 2016)
iv) Real interest rate: Real interest rate is the lending interest rate adjusted for inflation as
measured by the GDP deflator. The terms and conditions attached to lending rates differ
by country, limiting their comparability. (World development indicators, 2016). For our
purposes, we have used the weighted average daily interbank rate as reported in the
Nepal Rastra Bank website, which is the interest rate at which banks borrow and lend
their funds in the money market for short term.
v) Exchange rate: Official exchange rate refers to the exchange rate determined by
national authorities or to the rate determined in the legally sanctioned exchange market. It
is calculated as an annual average based on monthly averages (local currency units
relative to the U.S. dollar) (World development indicators, 2016).
vi) Gross Domestic Product (GDP): GDP is the sum of gross value added by all resident
producers in the economy plus any product taxes and minus any subsidies not included in
the value of the products (World development indicators, 2016).
1.8 Organization of Study

The organization of the study follows the trend of traditional research reports from
introduction of the study to data analysis to conclusion. More specifically, it starts with
the introduction to the study which includes the problem statement of the study, the
objectives, the importance of the study and limitations faced during the course of the
study. Then, a review of related studies is conducted in order to create the methodology
and the conceptual framework. In the third chapter, the methods used to complete the
study are detailed. Then, the data have been analyzed in order to derive the findings and
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finally in chapter five, the report has been summarized and a final conclusion has been
given.
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CHAPTER II
REVIEW OF LITERATURE AND THEORETICAL FRAMEWORK
2.1 Review of Literature

The external factors that can affect the bank’s performance are usually beyond the control
of company. It is important to understand the actual effects of such uncontrollable factors
in order to be better equipped to deal with them. Many studies have been conducted in
this area that explored the relations of macroeconomic factors on profitability of banks.
The most common external factors that have been identified include among others
competition/market share/firm size, inflation, GDP growth, and interest rate. Others have
also identified exchange rate as a factor that could influence profitability of banks. There
are mixed studies on profitability of banks based on the number of countries and types of
banks included in the study sample. ROA and ROE have been widely considered as
profitability measures.
Using bank level data for 80 countries in the 1988–95 period, Demirgüç-Kunt and
Huizinga (1998) analyze how bank characteristics and the overall banking environment
affect both interest rate margins and bank returns. Results suggest that macroeconomic
and regulatory conditions have a pronounced impact on margins and profitability.
Haron (1996) examined the impact of external factors which may have an influence on
the profitability of Islamic banks. The author identified competition, regulation, market
share, interest rate, money supply, inflation and bank size as the external determinants.
An interesting finding reported by Haron was that Islamic banks which operate in a
competitive market earned more than those operating in a monopolistic market.
Furthermore, his findings suggest that the theory which posits that the bigger the share of
bank in the market, the more profitable it would be does not apply to Islamic banks.
Similar results were established for money supply. However, Haron found that interest
rate, inflation and size have significant positive impact on the profits of Islamic banks.
These results confirm to the empirical findings in the conventional banking literature.
Naceur (2003) investigated the impact of banks characteristics, final structure and
macroeconomic indicators on ten major deposit banks of Tunisia’s net interest margin
and profitability for the 1983-2000 period using panel data techniques. It was found that
8
inflation and growth rates have negative impact while stock market development has
positive impact on profitability and net interest margin. However, these relationships
were found to be insignificant.
Haron and Azmi (2004) employed cointegration approach in measuring the relationship
between determinants variables and profitability measures of 5 major Islamic banks over
a period of 1984-2002. The study statistically proved direct relationship of inflation rate
and indirect relationship of real interest rate on profitability of the sample banks. Haron
(2004) investigated the determinants of Islamic bank profitability and found that CPI was
positively related to all profitability measures. However, their relationship was not
statistically significant.
Anwar and Herwany (2006) found out significant relation of economic growth, inflation
rate and real interest rate with ROA at 1% level but not with ROE. The purpose of the
research was to investigate factors that determine Commercial Bank’s Performance and
Profitability, especially among Provincial Government’s Banks and Private Non-Foreign
Exchange Banks in Indonesia for the period of 1993-2000. ROA and ROE were used as
the proxies for the profitability and cross sectional and pooled data were applied.
Macroeconomic Indicators are also used to assess the degree of relationship among
variables and their fluctuations. Statistics and econometrics are employed to find the
fittest model.
Ghazali (2008) considered six years’ data of 60 Islamic banks operating in 18 countries.
The study employed regression models that relate bank profitability ratios ROA, ROE
and NIM to various explanatory bank-specific and macroeconomic variables. The study
found a positively significant relationship between profitability measures of Islamic
banks and macroeconomic variables of GDP growth and inflation.
Constantinos & Sofoklis (2009) investigated the effects of bank-specific and

macroeconomic determinants of bank profitability, using a panel data approach of six
Greek banks. The inflation rate appeared to have a positive but slight effect on bank
profitability. Other macroeconomic variables investigated, such as GDP, were found to
be highly insignificant.
9
Flamini et al. (2009) used annual data of 389 banks operating in 41countries of Sub-
Saharan Africa for period 1998- 2006. The study concluded that macroeconomic
variables significantly affect bank profitability in Africa. In particular, inflation has a
positive effect on bank profits, which suggested that banks forecast future changes in
inflation correctly and promptly enough to adjust interest rates and margins. However,
GDP per capita did not seem to significantly affect bank returns.
Alper and Anbar (2011) study looked at the bank-specific and macroeconomic
determinants of the bank’s profitability in Turkey from 2002 to 2010. The bank
profitability is measured by ROA and ROE as a function of bank-specific and
macroeconomic determinants. Using a balanced panel data set, the results show that with
regard to macroeconomic variables, only the real interest rate affects the performance of
banks positively, suggesting that higher real interest rate can lead to higher bank
profitability.
Scott and Arias (2011) studied performance of five largest banks in United States. The
purpose of their study was to develop an appropriate econometric model whereby the
primary determinants of five largest companies of US could be examined. In this regard,
they proved that GDP did not directly affect the profit level of U.S banking sector.
Internal factors such as bank size proved more effective in determining profits, even
during decreases in GDP per capita.
Gul et al. (2011) examined the relationship between bank-specific and macro-economic
characteristics over bank profitability of top 15 Pakistani commercial banks for years
2005 – 2009. Using POLS regression method to investigate the impact of assets, loans,
equity, deposits, economic growth, inflation and market capitalization on major
profitability indicators i.e., ROA, ROE, return on capital employed (ROCE) and net
interest margin (NIM) separately, they investigated strong relationship between the
external variables and bank performance indicators. Specifically, GDP had direct and
significant impact on ROA which showed that rapid economic growth increase
profitability in Pakistan. Inflation also showed direct relationship with ROA. It means
that if banks expect general inflation to be higher in the future, they may believe that they
can increase their prices without suffering a drop in demand for their output.
10
Few scholars have also provided qualitative proofs of variables affecting the banks’
income. Shaher, Kasawneh, and Salem (2011) concentrated on evaluating the major
factors that affect the commercial banks’ performance in the Middle East region based on
factor analysis technique. They chose 23 variables and analyzed them according to factor
analysis techniques (PCA), in order to extract them in six different factors based on their
importance to banks’ performance. They distributed 320 questionnaires among bank-
related individuals and response proved important association of GDP with earnings.
Among the economic indicators variables, GDP per capita was the most important
variable and economic condition was the least important variable in this factor.
In the recent South Asian context, Sharma and Mani (2012) measured the impact on
Indian commercial banks for time period 2006-2011 and reported that the effect of GDP
and inflation on ROA was negligible. Correlation and linear regression analysis had been
used to measure the relationship between the variables. Deposits and Advances get
affected by the macroeconomic indicators, showing a greater degree of cause and effect
relationship between variables. It is also found during the study that Banks’ variables are
less affected by the financial market indicators showing a lesser degree of cause and
effect relationship between variables.
In the Bangladeshi context, Sufian and Kamarudin (2012) identified bank specific
characteristics and macroeconomic determinants of profitability in the Bangladesh’s
banking sector over the years 2000 to 2010 using a sample of 31 commercial banks in
Bangladesh. The determinants were identified using multiple regression analysis. The
results revealed that macroeconomic determinants significantly influenced profitability.
The relationship between economic growth and bank performance is negative and
significant while the coefficient of inflation was significant and positive.
Acarvaci and Calim (2013) also analyzed the bank specific and macroeconomic factors
that affect the profitability of commercial banks in Turkish banking sector by using
Johansen and Juselius cointegration test approach. Data for the period 1998 to 2011 from
the three biggest state-owned, privately-owned and foreign banks were used for analysis.
The macroeconomic determinants of study were real gross domestic product, inflation
rate, real exchange rate and real interest rate. The results on macroeconomic factors
11
showed that real gross domestic product and real exchange rate have been effective on
the profitability.
Kanwal and Nadeem (2013) conducted a study called “The Impact of Macroeconomic
Variables on the Profitability of Listed Commercial banks in Pakistan” and investigated
the effect of 3 major external factors; inflation rate, real gross domestic product (GDP)
and real interest rate on profitability indicators; return on assets (ROA), return on
equity(ROE) and equity multiplier (EM) ratios in 3 separate models of public limited
commercial banks in Pakistan for years 2001- 2011 using Pooled Ordinary Least Square
(POLS) method. The empirical findings indicated a strong positive relationship of real
interest rate with ROA, ROE and EM. Secondly, real GDP was found to have an
insignificant positive effect on ROA, but an insignificant negative impact on ROE and
EM. Inflation rate on the other hand, had a negative link with all 3 profitability measures.
Overall, the selected macroeconomic factors were found to have a negligible impact on
earnings of commercial banks.
Jaber (2014) studied a sample with 66 observations for years 2007-2012 using both
internal and external factors to determine profitability. He finds that internal variables;
capital adequacy, cost to income ratio, liquidity ratio and bank size are all negatively
related to profitability. He also finds that external variables; stock market capitalization
and inflation with the exception of GDP are positively related to profitability. He further
aggregated the factors, and find that aggregate internal factors are negatively related to
profitability and aggregate external factors are positively related to profitability.
Almost all of the previous research done on the subject had used panel data, that is, had
used the data of several banks over a number of years. Panel data set gives a generalized
overview as opposed to bank-specific behavior. Kiganda (2014) wanted to see the effects
of the macroeconomic factors on a single bank and hence conducted a case study on the
same subject titled “Effect of Macroeconomic Factors on Commercial Banks Profitability
in Kenya: Case of Equity Bank Limited”. Kiganda (2014) concluded that macroeconomic
factors do not affect bank profitability in Kenya. The results indicated that such factors
(real GDP, inflation and exchange rate) have insignificant effect on bank profitability in
Kenya with Equity bank in focus at 5% level of significance.
12
Sheefeni (2015) also confirmed similar result revealing that the variables gross domestic
product, inflation rate and interest rate do not significantly influence commercial bank’s
profitability in Namibia. This study examined the macroeconomic determinants for
commercial bank’s profitability in Namibia. This was done with the purpose of
establishing which of the determinant affects bank’s profitability with greater impact. The
study was based on quarterly data covering the period 2001: Q1 to 2014: Q2, utilizing the
technique of unit root, cointegration, impulse response functions and forecast error
variance decomposition. The results suggested that the macroeconomic environment does
not affect the commercial bank’s profitability in the Namibian context.
In Ghana, Antwi and Apau (2015) investigated the determinants of financial performance
of Rural and Community banks. Thirty (30) rural and community banks across the
country were purposefully selected for the period 2006-2010. Panel data was used in
regression analysis model to examine the variables that could affect the performance of
RCBs. The variables of the regression include credit risk, capital adequacy, portfolio
composition, bank size, operational efficiency, gross domestic product as well as inflation
(consumer price index). Of the macroeconomic variables, the findings are that gross
domestic product and annual rate of inflation are significant drivers of RCBs’
profitability in Ghana. Similarly, GDP is less significant factor in explaining the variation
in the profitability of the banks and it is inversely related to profitability per this study.
Unlike GDP, inflation rate, in the economy over the period seems to have impacted
profitability in a positive way showing how well managers in the sector are incorporating
inflation in their price build-ups.
Kapaya and Raphael (2016) analyzed effects of bank-specific, industry-specific and

macroeconomic determinants on banks profitability. It used a maximum of 350 firm-
years, from 52 banks from 1998 to 2010 in Tanzania. It did proxy profitability using
ROA, ROE and NIM. The study employed static fixed effects regression model as well as
dynamic fixed effects regression model. Inflation, as one of the factors that affects the
whole economy indicated a negative impact on ROA and NIM. Only the coefficient for
NIM was significant. Monetary policy proxied by money supply growth was negatively
related to ROA, ROE and NIM.
13
Boadi et al. (2016) analyzed bank specific, macroeconomic and some risk determinants
of bank profitability of rural and community banks (RCBs) in Ghana. They applied fixed
effect panel regression analysis on 114 RCBs annual financial reports during the period
2005-2013. The results regarding macroeconomic determinants suggested that gross
domestic product growth rate and inflation are significant determinants of RCBs
profitability though with varying degrees.
2.2 Research Gap

It is evident from the above literature review that many studies have been conducted in
different countries to either find the determinants of profitability of banks or to find the
effects of macroeconomic variables on bank profitability. All the researches have
concluded various outcomes, ranging from significant positive or negative relationships
between the variables to insignificant relationships. Since the results are so varying, there
has not been any established theory regarding the macroeconomic factors affecting bank
profitability. In addition, there had not been any such study published in terms of Nepal
and its banks. It was not clear what sort of relationship macroeconomic factors of GDP,
interest rate, inflation rate, and exchange rate had on profitability of commercial banks.
Further, most of the past foreign studies had relied on very large panel data set which
gives a generalized overview as opposed to bank specific characteristic. Hence, there is
still a huge area of unanswered questions in this research topic.
With Nepal’s unique economic makeup of pegged exchange rate system, high inflation
rates, and a remittance based economy, it is a novel to see the impacts of such factors on
commercial bank profitability of Nepal. This study on the other hand examined the
instances of three types of commercial banks: government owned bank, joint venture
bank and domestic private bank based on their established date and relative stability over
the years. This study fills the gap by use of annual data involving three banks to establish
bank-specific characteristics of the effect of macroeconomic factors on bank profitability
in Nepal.
From our study we have found that in terms of GDP and profitability, GDP had a
negative relationship with profitability of all banks except one. This relationship was
found to be significant in two instances, i.e. between ROE and two sample banks. In
14
terms of inflation and profitability of banks, majority of the bank’s profitability had
negative relationship with inflation. However, they were found to be insignificant. The
only significant relation was found between ROA of NCC and inflation rate which was
positive. Further, our analysis showed insignificant relations between profitability of
banks and exchange rate as well as interest rate.
The result found that there is some significant relationship between the profitability of
banks and the macroeconomic variables of Nepal.
2.3 Theoretical Framework

As seen in the literature review, almost all of the previous research done on the subject
had used panel data, that is, had used the data of several banks over a number of years.
Panel data set gives a generalized overview as opposed to bank-specific behavior.
Kiganda (2014) wanted to see the effects of the macroeconomic factors on a single bank
and hence conducted a case study on the same subject titled “Effect of Macroeconomic
Factors on Commercial Banks Profitability in Kenya: Case of Equity Bank Limited”.
Specific objectives were to determine, examine and evaluate effect of; economic growth
(real GDP), inflation and exchange rate on bank profitability in Kenya with Equity bank
in focus respectively. This study was modeled on the theory of production and based on
correlation research design. Sample size consisted annual data spanning 5 years from
2008- 2012. Data was obtained from the World Development Indicators, published
Equity bank documents (annual reports, investor briefings and financial statements). To
accomplish this task, the study used Cobb-Douglas production function transformed into
natural logarithm. The study employed OLS to establish the relationship between
macroeconomic factors and bank profitability. Kiganda (2014) concluded that
macroeconomic factors do not affect bank profitability in Kenya. The results indicated
that macroeconomic factors (real GDP, inflation and exchange rate) have insignificant
effect on bank profitability in Kenya with Equity bank in focus at 5% level of
significance. The study further mentioned that it was clear that internal factors which
relate to bank management significantly determine bank profitability in Kenya and
recommended that banks to adopt policies that enhance managerial efficiency for higher
profits to be realized.
15
Sheefeni (2015) also confirmed similar result revealing that the macroeconomic variables
do not significantly influence commercial bank’s profitability. The paper analyzed the
macroeconomic determinants for commercial bank’s profitability in Namibia by taking
three measures of profitability ROA, ROE, and Net Interest Margin (NIM). The study
was modeled after Acaravci and Calim (2013) and employed the techniques of unit root,
cointegration, and impulse response functions, and forecast error variance decomposition
on the quarterly data covering the period 2001 to 2014 of Namibian commercial banks.
The results revealed that the variables gross domestic product, inflation rate and interest
rate do not significantly influence commercial bank’s profitability in Namibia. This
suggests that the macroeconomic environment does not play a role in influencing the
profitability of the commercial banks. However, the author suggested that the results
should be interpreted with caution given the fact that aggregated data was used.
In this research that are modeled after the research works of Kiganda (2014) and Sheefeni
(2015), I hope to find the effects of macroeconomic factors viz. inflation rate, interest
rate, exchange rate, and real GDP on the profitability of commercial banks of Nepal.
Since various types of banks have different capacities to deal with external turbulence,
one bank of each type has been sampled which gives a true picture of the relationship
between macroeconomic variables and banks’ profitability of Nepal.
Real
Exchange
Interest
rate
rate
Inflation
Real GDP
rate Profitability
of
commercial
banks
Figure 1: Theoretical Framework

In the conceptual framework, the independent variables are conceptualized as
macroeconomic variables. The macroeconomic variables include real GDP, inflation rate,
interest rate, exchange rate. The dependent variable is commercial bank profitability
denoted by Return on Asset (ROA) and Return on Equity (ROE). The framework
16
hypothesizes that the macroeconomic variables directly affect commercial bank
profitability in Nepal. This relationship in the form of Cobb- Douglas production function
is represented as
Y it = β0 + β1X1it + β2X2 it + β3X3 it + β4X4 it + € ------------------------------------------------ 1
Where;
Y it = ROA or ROE, as applicable, X 1it = Real Gross Domestic Product, X2 it = Inflation

Rate, X3 it = Exchange Rate, X4 it = Interest Rate, β0 = Value of x-intercept which is
constant, β1, β2, β3 & β 4 = Proportionate change in dependent variable due to
independent variables, I = 1 to 4 Banks, t = 2005 -2015, € = Error term.
2.3.1 Dependent Variables

The dependent variable in this study is the profitability as measured by ROA and ROE.
Ratios instead of the real value of profits are used in measuring bank profitability because
ratios are not influenced by variations in the general price level and are the most
frequently used ratios in measuring bank profitability in the baking literature (Kiganda,
2014).
ROA measures the profit earned per Rupee of assets and reflects the efficiency of banks’
management to earn profits using financial and real resources (Kiganda, 2014). It is
computed as the banks’ after tax profit over total assets (Flemini, 2009). ROE ratio
reflects the effectiveness of bank’s management to transform every unit of shareholder’s
equity into profit.
2.3.2 Independent Variables

Four independent variables have been used in this study viz. real GDP, inflation rate,
exchange rate, and interest rate.
i) Real Gross Domestic Product (GDP)
GDP is the sum of gross value added by all resident producers in the economy plus any
product taxes and minus any subsidies not included in the value of the products (World
development indicators, 2016). According to Sufian and Habibullah (2010), favorable
conditions in an economy will positively impact the level of financial transactions, and
17
well managed banks will earn from loans and sale of securities. Also fast economic
growth enhances bank profitability (Demirguc - Kunt & Huizinga, 1999). This study will
use the annual GDP of Nepal for the period 2006- 2015.
ii) Inflation Rate
Inflation is measured by the consumer price index and reflects the annual percentage
change in the cost to the average consumer of acquiring a basket of goods and services
that may be fixed or changed at specified intervals, such as yearly (World development
indicators, 2016). Bashir (2003) (as cited by Kanwal and Nadeem 2013) indicates that
when inflation is anticipated, banks generate profits using high rates on loans in times of
the high inflation rate and if it is unanticipated, banks would not adjust rates timely and
overhead costs would rise quicker than inflation resulting in poor profits.
iii) Exchange Rate
Official exchange rate refers to the exchange rate determined by national authorities or to
the rate determined in the legally sanctioned exchange market. It is calculated as an
annual average based on monthly averages (local currency units relative to the U.S.
dollar) (World development indicators, 2016). Acarvaci and Calim (2013) found that real
exchange rate has been effective on the profitability in the Turkish banking sector.
iv) Interest Rate
Real interest rate is the lending interest rate adjusted for inflation as measured by the
GDP deflator. (World development indicators, 2016). For our purposes, we have used the
weighted average daily interbank rate as reported in the Nepal Rastra Bank website,
which is the interest rate at which banks borrow and lend their funds in the money market
for short term. The relationship between the interest rate and bank profits is said to be
positive.
18
CHAPTER III
RESEARCH METHODOLOGY
3.1 Research Design

The main purpose of the study is to examine the effect of macroeconomic variables like
inflation rate, real interest rate, exchange rate and real GDP on the profitability of
commercial banks of Nepal. Thus, the study is descriptive as well as analytical in nature
where mostly quantitative research techniques will be used.
In terms of data, since this is a macroeconomic study, secondary data has been used. The
commercial banks in Nepal are divided into three separate groups based on ownership
namely, (i) public sector banks, (ii) joint venture banks, and (iii) domestic private banks.
Out of population of 28 commercial banks at present, three commercial banks have been
sampled, one from each category of commercial bank based on ownership, that have been
relatively stable for the last ten years i.e. that have not gone into mergers or acquisitions.
The data has been gathered from the annual reports of the respective banks and World
Bank Publications and NRB reports for the macroeconomic data.
In analyzing the long-run relationship between macroeconomic determinants and

profitability variables, this study has adopted the techniques of Trend analysis, Pearson
Correlation and Multiple Regression Analysis. OLS (Ordinary Least Square) method has
been used because literature suggests that it is a valid method where variables show
stable relationship across the banks.
3.2 Sample Size Determination

The commercial banks in Nepal are divided into three separate groups based on
ownership namely, (i) public sector banks, (ii) joint venture banks, and (iii) domestic
private banks. Out of the population of 28 A class commercial banks, three commercial
banks have been sampled that have been relatively stable for the last ten years i.e. that
have not gone into mergers or acquisitions. The banks were chosen based on their
established date and stability for the last ten years.
First, all the commercial banks’ established years were listed, and those that had been
established prior to 2005 A.D. were separated so that at least 10 years of data could be
19
extracted for our study. (Annexure 1: List of banks and their established date). Second,
the separated banks were divided into three types of banks among: public sector bank,
joint venture bank, and domestic private bank. Finally, one bank from each group was
randomly selected for our study as Nepal Bank Limited as a public sector bank, Nabil
Bank as a joint venture bank, and Nepal Credit and Commerce Bank as a domestic
private bank.
Table 1: Sampling of Banks

Type of Commercial Banks Randomly Selected
Bank Sample Bank
Public 1. Rastriya Banijya Bank (RBBL), Nepal Bank Limited
sector bank 2. Nepal Bank Limited (NBL) (NBL)
3. Agriculture Development Bank (ADBL)
Joint 1. Nabil Bank Ltd (NABIL), Nabil Bank Ltd
venture 2. Standard Charter Bank Ltd (SCBL), (NABIL),
bank 3. Himalayan Bank Ltd (HBL),
4. Nepal SBI Bank Ltd (NSBI),
5. Nepal Bangladesh Bank Ltd (NBBL)
6. Everest Bank Ltd (EBL)
Domestic 1. Nepal Investment Bank Ltd (NIBL), Nepal Credit and
private bank 2. Bank of Kathmandu Ltd & Lumibini Bank Commerce Bank Ltd
Limited (BOK), (NCCB),
3. Nepal Credit and Commerce Bank Ltd (NCCB),
4. NIC Asia Bank (NICA),
5. Machhapuchhre Bank Ltd (MPBL),
6. Kumari Bank Ltd (KBL),
7. Laxmi Bank Ltd (LXBL)
8. Siddhartha Bank Ltd (SBL).
3.3 Data Collection Procedures

This study is mostly based on secondary data. Macroeconomic data has been taken from
World Bank Publication and NRB reports. Data for financial ratios has obtained from
annual financial statements of the sampled banks as well as NRB websites.
3.4 Instrumentation of Data

Since the study is conducted on three banks for the last ten years, which is multiple
individuals at multiple points of time, panel data set is used.
20
3.5 Validity and Reliability
Since secondary data has been used, that have been audited, verified, and published by
respectable and established institutions, the data is trusted to be reliable as well as valid.
The statistical tests t-test and F-tests has been involved to verify the results. The test is
necessary in determining the statistical significance of individual parameters and joint
significance with the aid of the relevant distribution tables.
3.6 Data Analysis Methods

After collecting the data, all the data/information were entered in the computer software
SPSS. They were then processed, tabulated and analyzed by using statistical tools in
SPSS. In analyzing the long-run relationship between macroeconomic determinants and
profitability variables, this study adopted the techniques of Trend analysis, Pearson
Correlation and Multiple Regression Analysis OLS (Ordinary Least Square).
Correlation is concerned with finding out whether there is an association between

variables and if there is determines its strength and direction. This study used correlation
coefficients obtained from the correlation matrix to determine if there exists correlation
between macroeconomic factors and bank profitability in Nepal.
Multicollinearity test has been conducted to find collinearity between the independent
variables.
Multiple regression analysis which refers to testing hypothesis about the relationship
between a dependent variable and two or more independent variables and for prediction.
OLS method has been used because literature suggests that it is a valid method where
variables show stable relationship across the banks. For performing regression analysis,
the significance level is assumed to be 5 percentages. Further, Durbin-Watson test has
been conducted to ensure that autocorrelation does not exist.
Different figures, graphs and tables have been used as applicable for the quantitative data.
All the data are presented in this report.
21
CHAPTER IV
PRESENTATION AND ANALYSIS OF DATA
The statistical tools used for the analysis are multiple regressions after removing the
problem of multicollinearity and correlation analysis. General trends of the variables have
also been briefly discussed.
4.1 Trend Analysis

The general trend of the independent and dependent variables are analyzed for 10 years to
see possible relations among the variables.
Real GDP (NPR, in billion)
Trend of GDP Trend of Inflation

25.00 12.00
20.00 10.00
15.00 8.00
Inflation ( %)
10.00 6.00
4.00
5.00
2.00
0.00
0.00
06
08
10
12
14
06 008 010 012 014

20
20
20
20
20
20 2 2 2 2
Year
Year
Trend of Exchange rate Trend of Interest rate

120.00 8.00
Exchange rate (NPR/USD)
7.00
Weighted average in-
100.00
6.00
terbank rate (%)
80.00 5.00
60.00 4.00
40.00 3.00
2.00
20.00 1.00
0.00 0.00
06 08 10 12 14 06 07 08 09 10 11 12 13 14 15
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
Year Year
Figure 2: Trend of Independent Variables (2006-2015)
22
In order to find the general trend, we have used the linear line of each variable. As we can
see in the above figures, GDP, inflation rate and exchange rate of Nepal is in an
increasing trend whereas the interest rate is in a decreasing trend in the last 10 years.
More specifically, GDP is clearly and consistently increasing each year. As for inflation,
although it has been decreasing steadily since 2012, the linear line suggests that inflation
has been in an increasing trend since the last 10 years. Exchange rate, too seems to be in
an increasing trend with some deviations in 2010 and 2011. The only independent
variable in a decreasing trend as suggested by the linear line is the interest rate, as
measured by weighted average interbank rate. The interest rate has been fluctuating very
much in the last 10 years, reaching its highest in 2010 and its lowest in 2014.
The trends of ROA of sample banks and ROE of sample banks have been analyzed
separately.
4.00 8.00
3.50 3.50 6.00
3.00 3.00 4.00
2.50 2.50 2.00
2.00 2.00 0.00

06
08
10
12
14
-2.00
20
20
20
20
20
1.50 1.50
1.00 1.00 -4.00
0.50 0.50 -6.00
0.00 -8.00
0.00
06
08
10
12
14
06
08
10
12
14
-10.00
20
20
20
20
20
20
20
20
20
20
NBL ROA Nabil ROA NCC ROA

Linear (NBL ROA) Linear (Nabil ROA) Linear (NCC ROA)
Figure 3: Trend of ROA of NBL, NABIL and NCC (2006-2015)
The figure shows that the ROA trends differ significantly for each bank. Although there
have been some spikes, the ROA of NBL is generally in a decreasing trend. The ROA of
Nabil on the other hand, has stayed generally consistent, but is in a slight decreasing
trend as suggested by the linear line. As for NCC, the ROA seems to be on an increasing
trend as suggested by the linear line. This increasing trend shows that NCC has been
23
utilizing its assets efficiently to generate profit, whereas NBL is lacking efficiency in this
regard.
100.00 40.00 200.00
35.00 180.00
0.00
30.00 160.00
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
140.00
-100.00 25.00
120.00
20.00
-200.00 100.00
15.00
80.00
-300.00 10.00 60.00
5.00 40.00
-400.00
0.00 06 20.00
08
10
12
14
-500.00 0.00
20
20
20
20
20
06
08
10
12
14
20
20
20
20
20
NBL ROE Nabil ROE NCC ROE
Linear (NBL ROE) Linear (Nabil ROE) Linear (NCC ROE)
Figure 4: Trend of ROE of NBL, NABIL and NCC (2006-2015)

All three figures show decreasing trend of ROE, which tells us that all the firm have been
utilizing their equity capital inefficiently to generate profits over the years. Specifically,
ROE of NBL has mostly been negative and dropped to a -458.43 in 2013. The ROE of
Nabil has had ups and downs but is generally in a decreasing trend as suggested by the
linear line. The ROE of NCC follows the same trend as well and has dropped
significantly from the initial years.
4.2 Correlation Analysis

Pearson’s correlation has been used for correlation analysis. The subsequent correlations
have also been tested for significance at 1% and 5% confidence levels. The correlation
matrices are given below.
24
Table 2 : Correlation Analysis: Macroeconomic variables and ROA of banks
Real
Inflation Exchange Interest Ln (NBL Nabil NCC
GDP rate rate rate ROA) ROA ROA
Real GDP Pearson

1 .200 .926** -.477 -.382 -.087 .350
Correlation
Sig. (2-tailed) .579 .000 .164 .277 .812 .321
Inflation Pearson
1 .067 .368 -.034 -.176 .732*
rate Correlation
Sig. (2-tailed) .855 .385 .925 .626 .016
Exchange Pearson
1 -.681* -.156 .067 .113
rate Correlation
Sig. (2-tailed) .030 .667 .854 .755
Interest rate Pearson
1 .207 -.361 .346
Correlation
Sig. (2-tailed) .566 .306 .327
Ln (NBL Pearson
1 .317 -.478
ROA) Correlation
Sig. (2-tailed) .372 .126
Nabil ROA Pearson
1 -.502
Correlation
Sig. (2-tailed) .139
NCC ROA Pearson
Correlation 1
Sig. (2-tailed)
**. Correlation is significant at the 0.01 level *. Correlation is significant at the 0.05 level
The above table is a correlation matrix of the macroeconomic variables and profitability
of banks represented by ROA. From the correlation matrix, we can see that inflation rate
and ROA of NCC have a large correlation coefficient of 0.732 which is significant. All
other correlation coefficients are low and are found to be insignificant. An interesting
observation is that some macroeconomic variables are found to be highly correlated with
each other. GDP and exchange rate are found to be highly correlated at 1% level of
significance. Exchange rate and interest rate are also found to be significantly correlated
at 5% level of significance. More specifically, natural log of ROA of NBL and ROA of
Nabil is negatively correlated with the GDP but ROA of NCC is positively correlated
with GDP. However, these relations are not found to be significant.
25
Natural log of ROA of NBL and ROA of Nabil is negatively correlated with the inflation
rate, which is found to be insignificant. However, ROA of NCC is positively correlated
with inflation rate at 5% level confidence.
Natural log of ROA of NBL is negatively correlated with the exchange rate. However,
ROA of Nabil and ROA of NCC are positively correlated with the exchange rate.
However, these relations are not found to be significant.
Natural log of ROA of NBL and ROA of NCC is positively correlated with the interest
rate. However, ROA of Nabil is negatively correlated with the interest rate. However,
these relations are not found to be significant.
Table 3: Correlation Analysis: Macroeconomic variables and ROE of banks

Real Inflation Exchange Interest NBL Nabil Ln (NCC
GDP rate rate rate ROE ROE ROE)
Real GDP Pearson
1 .200 .926** -.477 -.208 -.638* -.786*
Correlation
Sig. (2-tailed) .579 .000 .164 .565 .047 .010
Inflation Pearson
1 .067 .368 -.099 .012 -.114
rate Correlation
Sig. (2-tailed) .855 .295 .786 .973 .754
Exchange Pearson
1 -.681* -.279 -.531 -.560
rate Correlation
Sig. (2-tailed) .030 .435 .115 .092
Interest rate Pearson
1 .142 .157 .219
Correlation
Sig. (2-tailed) .695 .664 .543
NBL ROE Pearson
1 -.318 .133
Correlation
Sig. (2-tailed) .371 .715
Nabil ROE Pearson
1 .453
Correlation
Sig. (2-tailed) .189
Ln (NCC Pearson
ROE) Correlation 1
Sig. (2-tailed)
**. Correlation is significant at the 0.01 level *. Correlation is significant at the 0.05 level
The above table is a correlation matrix of the macroeconomic variables and profitability
of banks represented by ROE. From the correlation matrix, we can see that GDP and
26
ROE of Nabil as well as natural log of ROE of NCC have a large correlation coefficient,
which are found to be significant. All other correlation coefficients are low and are found
to be insignificant.
More specifically, ROE of all banks are negatively correlated with GDP. The negative
correlation between GDP and ROE of Nabil, and GDP and natural log of ROE of NCC
are found to be significant at 5% level of confidence.
ROE of NBL and ROE of NCC are negatively correlated with the inflation rate, which is
found to be insignificant. However, ROE of Nabil is positively correlated with inflation
rate which is also insignificant.
ROE of all banks are negatively correlated with the exchange rate and positively
correlated with the interest rate. However, these relations are not found to be significant.
4.3 Multiple Regression Analysis

With the independent variables real GDP and exchange rate proving to be highly
collinear, multiple regression analysis has been conducted between the dependent
variable as profitability of three sample banks and independent variables as interest rate
and exchange rate only.
Multiple regression is a flexible method of data analysis that may be appropriate

whenever a quantitative variable (the dependent or criterion variable) is to be examined
in relation to any other factors (expressed as independent variables).
Multiple regression model can be described as:
Yi = β1 + β2 X2i + β3 X3i +µi
Where,
– Y is the dependent variable
– X2 and X3 the explanatory variables (or repressors)
– u the stochastic disturbance term
– i the ith observation; in case the data are time series, the subscript t will denote the t th
observation
27
– β1 is the intercept term
– The coefficient β1 and β2 are called the partial regression coefficients
To test the significance of overall goodness of fit
Null Hypothesis (H0): β1=β2=β3=0
There is no significant relationship between dependent and all independent variables and
there is no significant difference between sensitivity of dependent variable with each
independent variable.
Alt Hypothesis (H1): At least one β1≠0
There is significant relationship between dependent variable and one independent

variable and there is significant difference between sensitivity of dependent variable with
each independent variable.
Table 4: NBL’s profitability as measured by ROA and Macroeconomic factors

Model Summary
Model R Square Std. Error of the Estimate Durbin-Watson
1 0.0570 0.74478 1.974
a. Predictors: (Constant), Interest rate, Inflation rate
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 0.235 2 0.117 0.212 0.814

Residual 3.883 7 0.555
Total 4.118 9
b. Dependent Variable: Ln (NBL ROA)
28
Coefficients(a)
Unstandardized Coefficients Sig.
Model
B Std. Error
1 (Constant) 0.134 1.443 0.929
Inflation -0.056 0.174 0.755
rate
Interest rate 0.068 0.106 0.54
Dependent Variable: Ln (NBL ROA)
The multiple regression equation can be written as: Y= 0.134 – 0.056 X1 + 0.068 X2
Where,
Y = Ln (ROA of NBL)
X1= Inflation rate
X2= Interest rate
The model summary table reports the strength of the relationship between performance
variables inflation rate and interest rate, and dependent variable ROA of NBL. R square,
the coefficient of determination, is the squared value of the multiple correlation
coefficients. It shows that 5.70% of variance in natural log of return on assets of NBL can
be explained by performance variables inflation rate and interest rate. With the linear
regression model, the error of estimate is very low, about 0.745.
From the ANOVA table we get the p-value 0.814 which is more than 0.05 thus we do not
reject Ho i.e. we accept Ho and hence conclude that there is an insignificant relationship
between the dependent variable Ln (ROA of NBL) and the independent variables interest
rate and inflation rate.
The above table also shows the coefficients of the regression line between inflation rate
and natural log of ROA of NBL. It states that one unit of change in inflation decreases the
natural log of ROA of NBL by 0.056 units. Here, the corresponding p-value is 0.755
which is more than 0.05. This shows that there is an insignificant relationship between
inflation rate and ROA of NBL.
The above table also shows the coefficients of the regression line between interest rate
and natural log of ROA of NBL. It states that one unit of change in interest increases the
29
natural log of ROA of NBL by 0.068 units. Here, the corresponding p-value is 0.54
interest rate and ROA of NBL.
The Durbin-Watson test statistic has also been calculated to test for positive or negative
autocorrelation. Since we have a sample size of 10 and regressors size of 2, d L = 0.466
and dU =1.333. In order to test for positive autocorrelation, the test statistic d is compared
to dL and dU. The Durbin-Watson test statistic of ROA of NBL is 1.974 (d) is clearly
above the upper critical value of 1.333. It means that there is no statistical evidence that
the error terms are positively correlated. For testing negative autocorrelation, (4-d) is
compared to dL and dU. Since 2.026 (i.e. 4-d) is greater than the upper critical value of
1.333, it means that there is no statistical evidence that the error terms are negatively
correlated either. Thus the null hypothesis of no autocorrelation is accepted as there is
evidence for the non-presence of autocorrelation. The Durbin-Watson statistic ranges in
value from 0 to 4. A value near 2 indicates non-autocorrelation; a value toward 0
indicates positive autocorrelation; a value toward 4 indicates negative autocorrelation.
Table 5: NBL’s profitability as measured by ROE and Macroeconomic factors
Model Summary
Model R Square Std. Error of the Estimate Durbin

Watson
1 0.0466 159.7889 2.658
ANOVA(b)
Model Sum of df Mean F Sig.
Squares Square
4370.2 0.1711 0.8461
8740.53 2
1 Regression 7 6 1
25532.
178728 7
Residual 5
Total 187468 9
30
b. Dependent Variable: NBL ROE
Coefficients(a)

Model
B Std. Error
54.988 309.6431 0.8641

1 (Constant)
Inflation
-16.469 37.3796 0.6728
rate
Interest
11.876 22.8313 0.6190
rate
a. Dependent Variable: NBL ROE

The multiple regression equation can be written as: Y= 54.988 – 16.469 X1 + 11.876 X2
Where, Y = ROE of NBL, X1= Inflation rate, X2= Interest rate
variables inflation rate and interest rate, and dependent variable ROE of NBL. The
independent variables accounted for 4.66% (R2 = .466) of variance in dependent
variable.
From the ANOVA table we get the p-value 0.8461 which is more than 0.05 thus we do
not reject Ho i.e. we accept Ho and hence conclude that there is an insignificant
relationship between the dependent variable ROE of NBL and the independent variables
interest rate and inflation rate. With the linear regression model, the error of estimate is
high, about 159.79.
and ROE of NBL. It states that one unit of change in inflation decreases the ROE of NBL
by 16.469 units. Here, the corresponding p-value is 0.6728 which is more than 0.05. This
shows that there is an insignificant relationship between inflation rate and ROE of NBL.
and ROE of NBL. It states that one unit of change in interest increases the ROA of NBL
31
shows that there is an insignificant relationship between interest rate and ROA of NBL.
autocorrelation. Since we have a sample size of 10 and regressors size of 2, d L = 0.466
and dU =1.333. In order to test for positive autocorrelation, the test statistic d is compared
to dL and dU. The Durbin-Watson test statistic of ROE of NBL is 2.568 (d) is clearly above
the upper critical value of 1.333. It means that there is no statistical evidence that the
error terms are positively correlated. For testing negative autocorrelation, (4-d) is
compared to dL and dU. Since 1.432 (i.e. 4-d) is greater than the upper critical value of
1.333, it means that there is no statistical evidence that the error terms are negatively
correlated either. Thus the null hypothesis of no autocorrelation is accepted as there is
evidence for the non-presence of autocorrelation.
Table 6: NBL’s profitability as measured by ROA and Macroeconomic factors
Model Summary
Durbin
Model R Square Std. Error of the Estimate
Watson
1 0.13226 0.39896 1.364
ANOVA(b)
Sum Mea
of n
Model df F Sig.
Squar Squa
es re
0.169 0.084 0.533 0.608
2
1 Regression 83 92 48 64
1.114 0.159
7
Residual 22 17
1.284
9
Total 05
32
b. Dependent Variable: Nabil ROA
Coefficients(a)

Model
B Std. Error
(Constant 2.7116 0.7731 0.0099

1 )
Inflation -0.0124 0.0933 0.8982
rate
Interest -0.0515 0.0570 0.3962
rate
a. Dependent Variable: Nabil ROA

The multiple regression equation can be written as: Y= 2.7116 – 0.0124 X1 - 0.0515 X2
Where,
Y = ROA of Nabil, X1= Inflation rate, X2= Interest rate
variables inflation rate and interest rate, and dependent variable ROA of Nabil. R square
shows that 13.23% of variance in Return on Assets of Nabil can be explained by
performance variables inflation rate and interest rate. With the linear regression model,
the error of estimate is very low, about 0.3989.
relationship between the dependent variable ROA of Nabil and the independent variables
interest rate and inflation rate.
and ROA of Nabil. It states that one unit of change in inflation decreases the ROA of
Nabil by 0.0124 units. Here, the corresponding p-value is 0.8982 which is more than
0.05. This shows that there is an insignificant relationship between inflation rate and
ROA of Nabil.
33
and ROA of Nabil. It states that one unit of change in interest decreases the ROA of
0.05. This shows that there is an insignificant relationship between interest rate and ROA
of Nabil.
autocorrelation where dL = 0.466 and dU =1.333. The Durbin-Watson test statistic of
ROA of NABIL is 1.364 (d) is clearly above the upper critical value of 1.333. It means
that there is no statistical evidence that the error terms are positively correlated. For
testing negative autocorrelation, (4-d) is compared to d L and dU. Since 2.636 (i.e. 4-d) is
greater than the upper critical value of 1.333, it means that there is no statistical evidence
that the error terms are negatively correlated either. Thus the null hypothesis of no
autocorrelation is accepted as there is evidence for the non-presence of autocorrelation.
34
Table 7: NBL’s profitability as measured by ROE and Macroeconomic factors
Model Summary
Model R Square Std. Error of the Estimate Durbin-

watson
1 0.02711 3.779364316 1.147
ANOVA(b)
Sum of
Mean
Model Square df F Sig.
Square
s
2.7863 1.3931 0.0975 0.9082
1 Regression 2
6 8 4 8
99.985 14.283
Residual 7
2 6
102.77
Total 9
2
a. Dependent Variable: Nabil ROE
Coefficients(a)

Model
B Std. Error
1 (Constant) 30.8354 7.3237 0.0040
Inflation
-0.1160 0.8841 0.8993
rate
Interest
0.2378 0.5400 0.6729
rate
The multiple regression equation can be written as: Y= 30.8354 – 0.1160 X1 - 0.2378 X2
35
Where, Y = ROE of Nabil, X1= Inflation rate, X2= Interest rate
variables inflation rate and interest rate, and dependent variable ROE of Nabil. R square
shows that only 2.71% of variance in Return on Equity of Nabil can be explained by
performance variables inflation rate and interest rate. With the linear regression model,
the error of estimate is very low, about 3.779.
relationship between the dependent variable ROE of Nabil and the independent variables
and ROE of Nabil. It states that one unit of change in inflation decreases the ROE of
0.05. This shows that there is an insignificant relationship between inflation rate and
ROE of Nabil.
and ROE of Nabil. It states that one unit of change in interest increases the ROE of Nabil
shows that there is an insignificant relationship between interest rate and ROE of Nabil.
autocorrelation. The Durbin-Watson test statistic of ROE of NABIL is 1.147 (d) which
clearly lies between the dL i.e. 0.466 and dU i.e. 1.333 and thus the null hypothesis of no
autocorrelation is within the inconclusive region of the number line and thus there is
evidence for the non-presence of positive autocorrelation. For testing negative
autocorrelation, since 2.853 (i.e. 4-d) is greater than the upper critical value of 1.333, it
means that there is no statistical evidence that the error terms are negatively correlated
either. Thus the null hypothesis of no autocorrelation is accepted as there is evidence for
the non-presence of autocorrelation.
36
Table 8: NCC Bank Limited’s profitability as measured by ROA and Macroeconomic factors
Model Summary
Std. Error of the Durbin-

Model R Square
Estimate Watson
1 0.54309 3.08767 1.670
ANOVA(b)
Sum of
Mean
Model Square df F Sig.
Square
s
79.322 4.160 0.064
1 Regression 2 39.6614
9 11 48
66.736
Residual 7 9.53374
1
146.05
Total 9
9
b. Dependent Variable: NCC ROA
Coefficients(a)
Model
B Std. Error
(Constan
1 -15.5325 5.9834 0.0356
t)
Inflation
1.8393 0.7223 0.0383
rate
Interest
0.1421 0.4412 0.7567
rate
a. Dependent Variable: NCC ROA
37
The multiple regression equation can be written as: Y= (15.5325) + 1.8393 X1 + 0.1421
X2
Where,
Y = ROA of NCC, X1= Inflation rate, X2= Interest rate
variables inflation rate and interest rate, and dependent variable ROA of NCC. The
coefficient of multiple determination (R square) indicates that 54.31% of variability in
ROA of NCC is due to the explanatory variables inflation rate and interest rate. With the
linear regression model, the error of estimate is very low, about 3.088.
relationship between the dependent variable ROA of NCC and the independent variables
and ROA of NCC. It states that one unit of change in inflation increases the ROA of NCC
by 1.8393 units. Here, the corresponding p-value is 0.0383 which is less than 0.05. This
shows that there is a significant relationship between inflation rate and ROA of NCC.
and ROA of NCC. It states that one unit of change in interest increases the ROA of NCC
shows that there is an insignificant relationship between interest rate and ROA of NCC.
autocorrelation where dL = 0.466 and dU =1.333. The Durbin-Watson test statistic of
ROA of NCC is 1.670 (d) is clearly above the upper critical value of 1.333. It means that
there is no statistical evidence that the error terms are positively correlated. For testing
negative autocorrelation, (4-d) is compared to dL and dU. Since 2.33 (i.e. 4-d) is greater
than the upper critical value of 1.333, it means that there is no statistical evidence that the
error terms are negatively correlated either. Thus the null hypothesis of no
autocorrelation is accepted as there is evidence for the non-presence of autocorrelation.
38
39
Table 9: NCC Bank Limited’s profitability as measured by ROE and Macroeconomic factors
Model Summary
Durbin-
Model R Square Std. Error of the Estimate
Watson
1 0.0920 1.0083 1.483
ANOVA(b)
Mean
Sum of
Model df Squar F Sig.
Squares
e
0.354
1 Regression 0.7211 2 0.3606 0.7133
6
Residual 7.1170 7 1.0167
Total 7.8382 9

b. Dependent Variable: Ln (NCC ROE)
Coefficients(a)

Model
B Std. Error
1 (Constant) 4.0501 1.954 0.0769
Inflation
-0.1372 0.2359 0.5791
rate
Interest
0.1125 0.1441 0.4607
rate
a. Dependent Variable: Ln (NCC ROE)
The multiple regression equation can be written: Y= 4.0501 – 0.1372 X1 + 0.1125 X2
40
Where,
Y = Ln (ROE of NCC), X1= Inflation rate, X2= Interest rate
variables inflation rate and interest rate, and dependent variable natural log of ROE of
NCC. The independent variables accounted for 9.20% (R2 = .0920) of variance in
dependent variable. With the linear regression model, the error of estimate is very low,
about 1.0083.
relationship between the dependent variable natural log of ROE of NCC and the
independent variables interest rate and inflation rate.
and natural log of ROE of NCC. It states that one unit of change in inflation decreases the
natural log of ROE of NCC by 0.1372 units. Here, the corresponding p-value is 0.5791
inflation rate and natural log of ROE of NCC.
and natural log of ROE of NCC. It states that one unit of change in interest increases the
natural log of ROE of NCC by 0.1125 units. Here, the corresponding p-value is 0.4607
interest rate and natural log of ROE of NCC.
autocorrelation where dL = 0.466 and dU =1.333. The Durbin-Watson test statistic of ROE
of NCC is 1.483 (d) is clearly above the upper critical value of 1.333. It means that there
is no statistical evidence that the error terms are positively correlated. For testing negative
autocorrelation, (4-d) is compared to dL and dU. Since 2.517 (i.e. 4-d) is greater than the
upper critical value of 1.333, it means that there is no statistical evidence that the error
terms are negatively correlated either. Thus the null hypothesis of no autocorrelation is
accepted as there is evidence for the non-presence of autocorrelation.
41
42
4.4 Summary of Hypothesis Testing
Considering correlation and multiple regression analysis, outcomes of the study are
summarized below.
Table 10: Summary of Hypothesis Testing Based on ROA
Hypothesis
Acceptanc
Bank Hypothesis Source
e/
Rejection
Ho1 There is no significant relationship Accepted Correlation

: between profitability of banks and real
GDP.

: between profitability of banks and ,
Nepal inflation rate. Regression
Bank
Limited Ho3 There is no significant relationship Accepted Correlation
: between profitability of banks and
exchange rate.

interest rate. Regression
Nabil Ho1 There is no significant relationship Accepted Correlation

Bank : between profitability of banks and real
Limited GDP.

inflation rate. Regression
43
exchange rate.


GDP.
Ho2 There is no significant relationship Rejected Correlation

NCC inflation rate. Regression
Bank
Limited Ho3 There is no significant relationship Accepted Correlation
exchange rate.

Table 11: Summary of Hypothesis Testing Based on ROE

Hypothesis
Bank Hypothesis Acceptance/ Source
Rejection
Nepal Ho1 There is no significant relationship Accepted Correlation
Bank : between profitability of banks and real
Limited GDP.
Ho2 There is no significant relationship Accepted Correlation,
: between profitability of banks and Regression
inflation rate.
44
exchange rate.
interest rate.
GDP.
Nabil
inflation rate.
Bank
Limited
exchange rate.
interest rate.
GDP.
NCC
inflation rate.
Bank
Limited
exchange rate.
interest rate.
45
Chapter V
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings

This chapter presents the brief summary of the entire study and highlights major findings
of the study. In addition, the major conclusions are discussed in separate section of this
chapter which is followed by the researcher’s opinion on the study. Finally, the chapter
ends with some implications and recommendation to the bankers, regulating bodies, and
future researchers.
The major independent variables for the study were real GDP, interest rate, inflation rate
and exchange rate while the dependent variables were ROA and ROE of three sample
banks (Nepal Bank Limited, Nabil Bank Limited and NCC Bank Limited). The statistical
tools used for the analysis are trend analysis, multiple regressions after removing the
problem of multicollinearity and correlation analysis. From the multicollinearity test, it
was found that real GDP and exchange rate are highly collinear. Hence, these variables
were removed from the study. The data were also normalized using natural logarithms of
data sets of ROA of NBL and ROE of NCC. The findings of the study are summarized
below.
5.1.1 Findings of relationship between GDP and Profitability

From the correlation analysis, it was found that profitability of all banks, with the
exception of ROA of NCC, are negatively correlated with GDP. The negative correlation
between GDP and ROE of Nabil, and GDP and ROE of NCC are found to be significant.
However, multiple regression was not conducted due to GDP being highly collinear with
other independent variables. From these findings, we can conclude that profitability of
banks increase when GDP decreases. GDP has an influence on ROE of two out 3 sample
banks.
5.1.2 Findings of relationship between Inflation and Profitability

Correlation analysis and multiple regression analysis gave the same results in terms of the
relationship between inflation and profitability of banks. From both analyses, the only
significant relation was found between ROA of NCC and inflation rate which was
positive. Rest all relations were found to be insignificant in all analysis of correlation and
46
regressions. Remaining all measures of profitability of banks had insignificant negative
relation with inflation rate.
We can conclude that inflation has little to no influence on the profitability of banks.
Inflation had an influence on the ROA of one sample bank.
5.1.3 Findings of relationship between Exchange rate and Profitability

The correlation analysis resulted in showing insignificant relations between profitability
of banks and exchange rate. The profitability measures of all banks showed negative
relations with exchange rate, with the exceptions ROA of NCC and NABIL. We can
conclude that exchange has little to no influence on the profitability of banks.
5.1.4 Findings of relationship between Interest rate and Profitability

The correlation matrices showed positive but insignificant correlation between
profitability of all banks and the interest rate. However, ROA of Nabil was negatively
correlated with the interest rate which was also found to be insignificant. This finding
was reiterated by the multiple regression findings as well. We can conclude that interest
has little to no influence on the profitability of banks.
5.2 Conclusion
Profitability is essential for a bank to maintain the activity and for its shareholders to
obtain deserving returns. Therefore, banks management, regulators are attracted and
concerned about the profitability of banking sector. Determinants of bank profitability
can be split between internal and external. Internal determinants are influenced by the
banks management decisions and policy objectives. External determinants are concerned
with those factors which are not influenced by specific banks policies and decisions. But
these are those events which are outside the influence of the bank. As financial
intermediaries, banks play a crucial role in the operations of most economies; the
efficiency of these banks can affect economic growth. Also, bank insolvencies can result
in systematic crisis. So, the determinants of profitability of bank are important.
In the context of Nepal, while internal factors are mostly monitored and scrutinized by
banks, the external factors might be overlooked. There has not been much study
published in terms of Nepal and its banks that focus on the effects of external factors,
47
specifically macroeconomic factors. It is important to see the effects of such economic
factors so that banks and financial institutions can better prepare themselves to equip
against volatile macroeconomic variables. With Nepal’s unique economic makeup of
pegged exchange rate system, high inflation rates, and a remittance based economy, it
was a novel to see the relationship of such factors on selected commercial banks'
profitability of Nepal.
A large number of previous studies of other countries tried to examine the relationship
between macroeconomic variables and profitability of banks. In this study, correlation
analysis, simple regression and multiple regressions are employed to test the effects of
macroeconomic factors on profitability of three sample banks viz. Nepal Bank Limited,
Nabil Bank Limited and Nepal Credit and Commerce Bank Limited for the period 2006
to 2015. Macroeconomic variables used in this study are GDP, Inflation rate, Exchange
rate and Interest rate.
The purpose of this research was to find out and study the causality, if any, between bank
profitability and real economic variables. The result found that there is some significant
relationship between the profitability of banks and the macroeconomic variables. It was
found that profitability of banks increase when GDP decreases. GDP had a significant
influence on ROE of two out 3 sample banks (Nabil Bank and NCC Bank). It indicates
that national growth has significant effect on profitability of joint venture banks and
domestic private banks. It may also indicate that ROE is a better indicator of profitability
for banks. However, we could not conduct regression analysis on GDP because of the
issue of multicollinearity. Hence, further study needs to be conducted on this particular
area.
On the other hand, it was found that inflation had a significant positive influence on the
ROA of only one sample bank (NCC Bank). It can be concluded that domestic private
banks are affected by inflation rate than other banks. On the other hand, interest and
exchange rate had insignificant relationship with the profitability of all sample banks.
Interest rate had mostly positive effect on profitability of sample banks whereas exchange
rate had mostly negative effect on profitability of sample banks.
48
5.3 Recommendations
The research was conducted in order to get knowledge about the relationship of
macroeconomic variables on the profitability of selected commercial banks' of Nepal,
with specific case studies of Nepal Bank Limited, Nabil Bank Limited and NCC Bank
Limited. The following are some of the suggestions recommended after doing the
research:
 It is found that real GDP had significant relationship with ROE of two sample banks.
Hence bank should focus on keeping this variable in favorable state so that it will
help to keep profits high.
 It is found that inflation had significant relationship with ROA of one sample bank
(domestic private bank). Hence such banks should focus on keeping this variable in
favorable state so that it will help to keep profits high.
 Further research must be conducted on the relationship between macroeconomic

variables and the profitability of banks.
 Strength of relationship between performance variables and profitability of banks is

not analyzed in this study. Hence this can be taken as extension of this topic in future
research.
 This study incorporated only two profitability measure. So in future study other
profitability measures can also be taken which might be better indicators of
profitability of banks.
 This study incorporated only four performance variables. So in future study other
performance variables can also be taken.
 This study is mainly focused in banking industry only, with specific study of Nepal
Bank Limited, Nabil Bank Limited and NCC Bank Limited. Same model with some
required revision can be used in studying other industry as well.
49
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ANNEX
List of commercial banks and their established date
S.No
Commercial banks Established Year
.
1 Nepal Bank Limited 1957
2 Rastriya Banijya Bank Limited 1966
3 Agriculture Development Bank Limited 1968
4 Nabil Bank Limited 1984
5 Nepal Investment Bank Limited 1986
6 Standard Chartered Bank Limited 1987
7 Himalayan Bank Limited 1993
8 Nepal SBI Bank 1993
9 Nepal Bangladesh Bank Limited 1993
10 Everest Bank Limited 1994
11 Bank of Kathmandu and Lumbini Bank Limited 1995
12 Nepal Credit and Commerce Bank Limited 1996
13 Machchapuchre Bank Limited 2000
14 Kumari Bank Limited 2001
15 Laxmi Bank Limited 2002
16 Siddartha Bank Limited 2002
17 Citizens Bank International Limited 2007
18 Prime Commercial Bank Limited 2007
19 NIC Asia Bank Limited 2013
20 NMB Bank Limited 2009
21 Prabhu Bank Limited 2009
22 Mega Bank Nepal Limited 2009
23 Sunrise Bank Limited 2009
24 Janata Bank Nepal Limited 2009
25 Civil Bank Limited 2010
26 Century Bank Limited 2011
27 Sanima Bank Limited 2011
28 Global IME Bank Limited 2013
MULTICOLLINEARITY STATISTICS
1. Multicollinearity statistics with dependent variable as NBL ROE
Unstandardized Coefficients Collinearity Statistics

Model Sig.
B Std. Error Tolerance VIF
1 (Constant) 297.146 613.400 .649
Real GDP (in billion) 44.205 88.483 .639 .098 10.155
Inflation rate -7.918 47.942 .875 .673 1.487
Exchange rate -11.820 18.305 .547 .068 14.731
Interest rate -12.344 44.572 .793 .290 3.445
a. Dependent Variable: NBL ROE
2. Multicollinearity statistics with dependent variable as Nabil ROA

Model Sig.
1 (Constant) 3.488 1.507 .068
Real GDP (in billion) -.107 .217 .644 .098 10.155
Inflation rate .027 .118 .826 .673 1.487
Exchange rate .009 .045 .855 .068 14.731
Interest rate -.075 .109 .525 .290 3.445
a. Dependent Variable: Nabil ROA
3. Multicollinearity statistics with dependent variable as Nabil ROE

Model Sig.
1 (Constant) 48.336 10.744 .006
Real GDP (in billion) -1.498 1.550 .378 .098 10.155
Inflation rate .731 .840 .424 .673 1.487
Exchange rate .025 .321 .941 .068 14.731
Interest rate -.486 .781 .561 .290 3.445
4. Multicollinearity statistics with dependent variable as NCC ROA

Model Sig.
1 (Constant) -21.826 9.891 .078
Real GDP (in billion) 2.113 1.427 .199 .098 10.155
Inflation rate 1.458 .773 .118 .673 1.487
Exchange rate -.304 .295 .351 .068 14.731
Interest rate .058 .719 .939 .290 3.445
a. Dependent Variable: NCC ROA
5. Multicollinearity statistics with dependent variable as NCC ROE

Model Sig.
1 (Constant) 345.648 134.547 .050
Real GDP (in billion) -47.864 19.409 .057 .098 10.155
Inflation rate 1.808 10.516 .870 .673 1.487
Exchange rate 5.737 4.015 .212 .068 14.731
Interest rate -1.032 9.777 .920 .290 3.445
a. Dependent Variable: NCC ROE

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RELATIONSHIP BETWEEN MACROECONOMIC

VARIABLES ON SELECTED COMMERCIAL BANKS’

A Thesis Submitted to:

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE

December 24, 2017

CHAPTER II : REVIEW OF LITERATURE AND THEORETICAL FRAMEWORK...........7

CHAPTER III : RESEARCH METHODOLOGY.......................................................................18

CHAPTER IV : PRESENTATION AND ANALYSIS OF DATA..............................................21

Table 1: Sampling of Banks...............................................................................................................19

Figure 1: Theoretical Framework.......................................................................................................15

NABIL : Nabil Bank Limited

NBL : Nepal Bank Limited

NCC : Nepal Credit and Commerce Bank Limited

NIM : Net Interest Margin

NRB : Nepal Rastra Bank

OLS : Ordinary Least Square

POLS : Pooled Ordinary Least Square

ROA : Return on Assets

ROCE : Return on Capital Employed

ROE : Return on Equity

VIF : Variance Influencing Factor

1.1 Background of the Study

1.2 Statement of the Problem

Hence, the problem statement of this research is as follows:

 Is there a relationship between the macroeconomic factors of Nepal (real GDP,

1.3 Objectives of the Study

1.4 Rationale of the Study

1.5 Research Hypothesis

1.6 Limitation of the Study

1.7 Operational Definitions

1.8 Organization of Study

2.1 Review of Literature

Constantinos & Sofoklis (2009) investigated the effects of bank-specific and

Kapaya and Raphael (2016) analyzed effects of bank-specific, industry-specific and

2.2 Research Gap

2.3 Theoretical Framework

Figure 1: Theoretical Framework

Y it = β0 + β1X1it + β2X2 it + β3X3 it + β4X4 it + € ------------------------------------------------ 1

Y it = ROA or ROE, as applicable, X 1it = Real Gross Domestic Product, X2 it = Inflation

2.3.1 Dependent Variables

2.3.2 Independent Variables

i) Real Gross Domestic Product (GDP)

ii) Inflation Rate

iii) Exchange Rate

iv) Interest Rate

3.1 Research Design

In analyzing the long-run relationship between macroeconomic determinants and

3.2 Sample Size Determination

Table 1: Sampling of Banks

3.3 Data Collection Procedures

3.4 Instrumentation of Data

3.6 Data Analysis Methods

Correlation is concerned with finding out whether there is an association between

4.1 Trend Analysis

Trend of GDP Trend of Inflation

06 008 010 012 014

Trend of Exchange rate Trend of Interest rate

Figure 2: Trend of Independent Variables (2006-2015)

3.50 3.50 6.00

3.00 3.00 4.00

2.50 2.50 2.00

2.00 2.00 0.00

1.00 1.00 -4.00