Factors Influencing Bank Profitability in a Developing Economy

Abstract

The purpose of this paper is to investigate the bank-specific and macroeconomic determinants of commercial banks profitability operating in Bangladesh to explore the role of both internal and external factors in achieving high profitability. The fixed effect model is built on a balanced panel data set comprising 135 observations of 27 commercial banks over the period 2014-2018. Regression findings reveal that size and capital ratio are significant bank-specific determinants of bank profitability in Bangladesh where the effect of loans ratio is statistically insignificant. Findings also suggest that banks with higher deposits tend to be more profitable, and small banks have efficient management. The cost-to-income ratio and loan loss provisions are statistically insignificant on the performance of banks. On the other hand, macroeconomic variables such as GDP growth have a significant impact on profitability whereas the effects of inflation on profitability are statistically insignificant in some cases.