Profitability Determinants Of Banks In Bangladesh

Banking institutions have a vital role to perform financial activities of economies. They dealt with financial instruments, payment mechanism, transfer and management of risk, assurance of transparency in financial markets and activity that assess the behavior of financial institutions. Particularly, Islamic banks have maintained its position well due to availability of potential target market (Ali and Raza, 2015a). It is also necessary for banks to create awareness about its product and services to be more profitable. The banks are considered very essential for economy functions and also perform a very critical role as a financial intermediaries in the service providing economies. Furthermore, major crisis can be caused by insolvencies by the bank. The profitability of banking sector not only contributes in economies but also the instability of the financial system and enables economies to endure the external and negative financial shocks. Therefore, it is crucial to understand profitability determinants.

Banks not only contribute in an economy but also provide people to invest and save their money through secured and ensured mode of investment. In recent times, the banking system is more concerned about their profitability. But there are various external and internal factors that can affect bank’s profitability. Past studies report external factors like liquidity, bank size, capitalization, operating efficiency, financial while external factors are generally associated with macro-economic environment like inflation and GDP.

Born in 1971, Bangladesh witnessed a phenomenal growth in banking industry since the liberalization policy was introduced in 1980s. Before the liberalization policy, there were only four domestic banks (Sonali Bank, Pubali Bank, Rupali Bank, and Janta Bank) in Bangladesh and they were nationalized. There were only three foreign banks. However, there was no private bank. As a result, there was no competition in the banking industry of Bangladesh. The banking market was highly concentrated and dominated by four nationalized banks. The profitability of banks was highly unsatisfactory due to corruption.

Since the liberalization policy was introduced, domestic private banks started growing and foreign banks were entering into Bangladesh. There are now fifty two banks operating in Bangladesh including eight foreign banks and seven Islamic banks. Of them, forty three are commercial banks. The total profit of commercial banks was TK 227299 (Million) in 2010. The profit of Commercial banks shows mixed picture in 2012.This study considered a panel of total 26 banks, which include 17 conventional, 5 Islamic and 4 public banks. This is the period when the banking system of Pakistan adapted more technological advancement.