PROFITABILITY DETERMINANTS OF NEPALESE COMMERCIAL BANKS

Abstract

Purpose- The purpose of this study is to examine the the key determinants of profitability of Nepalese commercial banks. Methodology- This study employs descriptive statistics to describe the profitability of Nepalese banks and its determinants. Further, the degree of correlation among different indicators of profitability and its determinants has been assessed by calculating correlation coefficient. Finally, this study has adopted a panel data regression model (Fixed Effect Model and Random Effect Model) to investigate the determinants and their impact on profitability of Nepalese commercial banks. Findings- The analysis reveals that the bank pofitability measured by ROA of Nepalese commercial banks is significantly affected by concentration ratio, banking sector development, GDP growth, inflation and exchange rate significantly in opposite direction rather it is not significantly affected by the internal factors like bank size, capital base, deposit, loan, off-balance sheet activities and number of branches. Another indicator of bank profitability; NIM is significantly affected only by capital adequacy, absolute number of branches and inflation rate. Conclusion- This study concluded that the profitability of Nepalese commercial banks measured by return on assets is significantly influenced by the external factors. Among external factors, industry specific factors have high degree of impact on return on assets whereas macroeconomic variables have quite a weak degree but significant impact on profitability of Nepalese commercial banks as measured by return on assets. Further, the profitability measured by net interest margin (NIM) is significantly influenced only by capital adequacy, absolute number of branches and annual inflation rate.

Keywords

• Nepalese commercial banks
• bank profitability
• profitability determinants
• internal and external determinants
• ROA and NIM

References

1. Akbas, H. E., & Karaduman, H. A. (2012). The effect of firm size on profitability: An empirical investigation on Turkish manufacturing companies. European Journal of Economics, Finance and Administrative Sciences, 55.
2. Al-Harbi, A. (2019). The determinants of conventional banks profitability in developing and underdeveloped OIC countries. Journal of Economics, Finance and Administrative Science, 24(47), 4–28. https://doi.org/10.1108/JEFAS-05-2018-0043
3. Al-Homaidi, E. A., Tabash, M. I., Farhan, N. H. S., & Almaqtari, F. A. (2018). Bank-specific and macro-economic determinants of profitability of Indian commercial banks: A panel data approach. Cogent Economics and Finance, 6(1), 1–26. https://doi.org/10.1080/23322039.2018.1548072
4. Ali, K., Akhtar, M. F., & Ahmed, H. Z. (2011). Bank-Specific and Macroeconomic Indicators of Profitability - Empirical Evidence from the Commercial Banks of Pakistan. International Journal of Business and Social Science, 2(6), 235–242.
5. Alper, D., & Anbar, A. (2011). OKUNDU_02.03.2018_GÜZEL_Bank Specific and Macroeconomic Determinants of Commercial Bank Profitability: Empirical Evidence from Turkey. Business & Economics Research Journal, 2(2), 139–152.
6. Ameur, I. G. Ben, & Mhiri, S. M. (2013). Explanatory Factors of Bank Performance Evidence from Tunisia. International Journal of Economics, Finance and Management, 2(1).
7. Athanasoglou, P. P., Brissimis, S. N., & Delis, M. D. (2008). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets, Institutions and Money, 18(2), 121–136. https://doi.org/10.1016/j.intfin.2006.07.001
8. Baltagi, B. (2005). Econometric analysis of panel data. In Vasa.

9. Ben Selma Mokni, R., & Rachdi, H. (2014). Assessing the bank profitability in the MENA region. International Journal of Islamic and Middle Eastern Finance and Management, 7(3). https://doi.org/10.1108/imefm-03-2013-0031
10. Bougatef, K. (2017). Determinants of bank profitability in Tunisia: does corruption matter? Journal of Money Laundering Control, 20(1). https://doi.org/10.1108/JMLC-10-2015-0044
11. Breusch, T. S., & Pagan, A. R. (1980). The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics. The Review of Economic Studies, 47(1). https://doi.org/10.2307/2297111
12. Chirwa, E. W. (2003). Determinants of commercial banks’ profitability in Malawi: A cointegration approach. Applied Financial Economics, 13(8). https://doi.org/10.1080/0960310022000020933
13. Chowdhury, M. A. F., & Rasid, M. E. S. M. (2016). Determinants of Performance of Islamic Banks in GCC Countries: Dynamic GMM Approach. In Advances in Islamic Finance, Marketing, and Management. https://doi.org/10.1108/978-1-78635-899-820161005
14. Demirgüç-Kunt, A., & Huizinga, H. (1999). Determinants of commercial bank interest margins and profitability: Some international evidence. World Bank Economic Review, 13(2), 379–408. https://doi.org/10.1093/wber/13.2.379
15. Demirgüç-Kunt, A., & Huizinga, H. (2000). Financial Structure and Bank Profitability. International Journal of Cooperative Information Systems. https://doi.org/10.1596/1813-9450-2430
16. Eljelly, A. M. A. (2013). Internal and external determinants of profitability of Islamic banks in Sudan: Evidence from panel data. Afro-Asian Journal of Finance and Accounting, 3(3). https://doi.org/10.1504/AAJFA.2013.054424
17. Flamini, V., Schumacher, L., & McDonald, C. A. (2009). The Determinants of Commercial Bank Profitability in Sub-Saharan Africa. IMF Working Papers. https://doi.org/10.5089/9781451871623.001
18. Garcia, M. T. M., & Trindade, M. J. (2019). Determinants of banks’ profitability in Angola. African Journal of Economic and Management Studies, 10(1). https://doi.org/10.1108/AJEMS-06-2018-0161
19. Ghosh, S. (2016). How Do Banks Influence Firm Capital Structure? Journal of Corporate Accounting & Finance, 27(6). https://doi.org/10.1002/jcaf.22189
20. Gul, S., Irshad, F., & Zaman, K. (2011). Factors Affecting Bank Profitability in Pakistan. Romanian Economic Journal, 3(2).
21. Gwachha, K. P. (2019). Bank specific and macroeconomic determinants of banking profitability in Nepal Research methodology. SEBON Journal, VII(May 2019), 120–129.
22. Hausman, J. A. (1978). Specification Tests in Econometrics EC ON ME R C A VOLUME 46 NOVEMBER, 1978 NUMBER 6 SPECIFICATION TESTS IN ECONOMETRICS. Econometrica, 46(6).
23. Hun, M. P. (2011). Practical Guides To Panel Data Modeling : A Step by Step. Public Management and Public Analysis Program, 1–53.
24. Islam, S., & Shohel Rana, M. (2019). Determinants of Bank Profitability: Evidence from Commercial Banks of Bangladesh. Journal of Asian Business Strategy, 9(2), 174–183. https://doi.org/10.18488/journal.1006.2019.92.174.183
25. Jara‐Bertin, M., Arias Moya, J., & Rodríguez Perales, A. (2014). Determinants of bank performance: evidence for Latin America. Academia Revista Latinoamericana de Administracion, 27(2). https://doi.org/10.1108/ARLA-04-2013-0030
26. Kosmidou, K., Pasiouras, F., Doumpos, M., & Zopounidis, C. (2006). Assessing performance factors in the UK banking sector: A multicriteria methodology. Central European Journal of Operations Research, 14(1). https://doi.org/10.1007/s10100-006-0158-5
27. Kosmidou, Kyriaki. (2007). The determinants of banks’ profits in Greece during the period of EU financial integration. Managerial Finance, 34(3). https://doi.org/10.1108/03074350810848036
28. Madishetti, S., & Rwechungura, K. A. (2013). A sian R esearch C onsortium Determinants of Bank Profitability in a Developing Economy : Empirical Evidence from Tanzania. 3(11).
29. Masood, O., & Ashraf, M. (2012a). Bank-specific and macroeconomic profitability determinants of Islamic banks: The case of different countries. Qualitative Research in Financial Markets, 4(2–3). https://doi.org/10.1108/17554171211252565
30. Masood, O., & Ashraf, M. (2012b). Bank‐specific and macroeconomic profitability determinants of Islamic banks. Qualitative Research in Financial Markets, 4(2/3). https://doi.org/10.1108/17554171211252565
31. Menicucci, E., & Paolucci, G. (2016). The determinants of bank profitability: empirical evidence from European banking sector. In Journal of Financial Reporting and Accounting (Vol. 14, Issue 1). https://doi.org/10.1108/jfra-05-2015-0060
32. Nguyen, T.-M. (2011). Learning to communicate in a globalized world: To what extent do school textbooks facilitate the development of intercultural pragmatic competence? In RELC Journal (Vol. 42, Issue 1). https://doi.org/10.1177/0033688210390265
33. Olalere, O. E., Bin Omar, W. A., & Kamil, S. (2017). Bank Specific and Macroeconomic Determinants of Commercial Bank Profitability: Empirical Evidence from Nigeria. International Journal of Finance & Banking Studies (2147-4486), 6(1). https://doi.org/10.20525/ijfbs.v6i1.627
34. Ongore, V. O., & Kusa, G. B. (2013). International journal of economics and financial issues. International Journal of Economics and Financial Issues, 3(1), 237–252. http://www.econjournals.com/index.php/ijefi/article/view/334
35. Osuagwu, E. S. (2014). Determinants of Bank Profitability in Nigeria. International Journal of Economics and Finance, 6(12), 1–20. https://doi.org/10.5539/ijef.v6n12p46
36. Owoputi, J. A. (2014). BANK SPECIFIC, INDUSTRY SPECIFIC AND MACROECONOMIC DETERMINANTS OF BANK PROFITABILITY IN NIGERIA Olawale Femi Kayode, Postgraduate student Felix Ademola Adeyefa, Postgraduate student. In European Scientific Journal (Vol. 10, Issue 25).
37. Owoputi, J. A., Kayode, O. F., & Adeyefa, F. A. (2014). Bank specific, industry specific and macroeconomic determinants of bank profitability in Nigeria. European Scientific Journal, 10(25).
38. Pasiouras, F., & Kosmidou, K. (2007). Factors influencing the profitability of domestic and foreign commercial banks in the European Union. Research in International Business and Finance, 21(2). https://doi.org/10.1016/j.ribaf.2006.03.007
39. Petria, N., Capraru, B., & Ihnatov, I. (2015). Determinants of Banks’ Profitability: Evidence from EU 27 Banking Systems. Procedia Economics and Finance. https://doi.org/10.1016/s2212-5671(15)00104-5
40. Pradhan, R. S. (2018). Bank Specific and Macroeconomic Determinants of Bank Profitability: A Case of Nepal. SSRN Electronic Journal, 1–11. https://doi.org/10.2139/ssrn.2793484
41. Pradhan, R. S., & Shrestha, R. (2018). Impact of Bank Specific and Macroeconomic Variables on the Performance of Commercial Banks of Nepal. SSRN Electronic Journal, 47, 91–110. https://doi.org/10.2139/ssrn.2793530
42. Rahman, M. M., Hamid, M. K., & Khan, M. A. M. (2015). Determinants of Bank Profitability: Empirical Evidence from Bangladesh. International Journal of Business and Management, 10(8), 135–150. https://doi.org/10.5539/ijbm.v10n8p135
43. Rani, D. M. S., & Zergaw, L. N. (2017). Bank Specific , Industry Specific and Macroeconomic Determinants of Bank Profitability in Ethiopia Issn : 2278-6236. International Journal of Advanced Research in Management and Social Sciences, 6(3).
44. Raza, H., Saeed, A., & Hena, S. (2019). Determinants of Profitability in Banking Sector: An Evidence from Pakistan. European Scientific Journal ESJ, 15(7). https://doi.org/10.19044/esj.2019.v15n7p35
45. Riaz, S., & Mehar, A. (2013). The impact of Bank Specific and Macroeconomic Indicators on the Profitability of Commercial banks. The Romanian Economic Journal, XVI(47), 91–110.
46. Saona, P. (2016). Intra- and extra-bank determinants of Latin American Banks’ profitability. International Review of Economics and Finance, 45, 197–214. https://doi.org/10.1016/j.iref.2016.06.004
47. Singh, A., & Sharma, A. K. (2016). An empirical analysis of macroeconomic and bank-specific factors affecting liquidity of Indian banks. Future Business Journal, 2(1). https://doi.org/10.1016/j.fbj.2016.01.001
48. Staikouras, C. K., & Wood, G. E. (2011). The Determinants Of European Bank Profitability. International Business & Economics Research Journal (IBER), 3(6). https://doi.org/10.19030/iber.v3i6.3699
49. Sufian, F. (2011). Profitability of the Korean Banking Sector: Panel Evidence on Bank-Specific and Macroeconomic Determinants. Journal of Economics and Management, 7(1), 43–72.
50. Sufian, F., & Kamarudin, F. (2012). Bank-Specific and Macroeconomic Determinants of Profitability of Bangladesh’s Commercial Banks. Bangladesh Development Studies, 35(4), 1–29.
51. Sultan, K., Rzgar Ahmed, R., Mohammad Ameen, F., & Singh, M. (2020). THE EFFECT OF MACROECONOMIC & BANK SPECIFIC FACTORS ON BANKS PROFITABILITY: AN EMPIRICAL EVIDENCE FROM BANKING INDUSTRY OF PAKISTAN. Humanities & Social Sciences Reviews, 8(3). https://doi.org/10.18510/hssr.2020.8368
52. Tariq, W., Usman, M., Mir, H. Z., Aman, I., & Ali, I. (2014). Determinants of Commercial Banks Profitability: Empirical Evidence from Pakistan. International Journal of Accounting and Financial Reporting, 1(1). https://doi.org/10.5296/ijafr.v4i2.5939
53. Valverde, S. C., & Fernández, F. R. (2007). The determinants of bank margins in European banking. Journal of Banking and Finance, 31