The Impact of Inflation on Bank Profitability: Empirical Evidence from Iraq

Abstract

This study aims primarily to analyze the relationship between inflation and the financial performance of a sample of Iraqi banks. Besides the inflation, considered as the key macroeconomic variable, four other independent variables, namely the growth rate, liquidity risk, leverage, and size are added to explain bank profitability. Our sample consists of 14 Iraqi banks over the period from 2012 to 2022. Using panel data techniques, we provide evidence that the financial performance of Iraqi banks is negatively affected by inflation. We also find that bank profitability is positively affected by the GDP growth, the bank size, and leverage. However, the effect of the liquidity risk according to the measure used for bank profitability (return on assets or return on equity).