Economics and Business
ISSN 2775-9237 (Online)
Published: 16 April 2020
The Impact of Liquidity, Leverage, and Total Size on Banks’ Profitability: Evidence from Nepalese Commercial Banks
Prem Bahadur Budhathoki, Chandra Kumar Rai, Kul Prasad Lamichhane, Ganesh Bhattarai, Arjun Rai
Tribhuvan University, Nepal
Download Full-Text Pdf
Keywords: Liquidity, Leverage, Bank Size, Profitability
This paper examined the impact of liquidity, leverage, and total assets size of the bank on profitability. This study employed bank scope data of all 28 commercial banks operating in Nepal during the period of 2010/11 – 2016/17. Altogether, the168 observations were used in the study. Three ordinary-least-squares models were applied to analyze the impact of liquidity, leverage, and the total size on the bank’s profitability. The first regression model reveals that the higher loan to deposit ratio (low level of liquidity) was observed to have the negative effect on the bank’s ROA, ROE, and NIM; however, ROE and NIM were statistically insignificant. The result of the second regression model shows that higher equity to assets ratio (lower leverage) positively affected two profitability measures, ROA and NIM, and was statistically significant—but was negatively related to ROE and statistically insignificant. The result of the final regression model reveals that the higher bank size appeared favorable to the Nepalese commercial banks and was found to have positive effects on all three profitability measures: ROA, ROE, and NIM. The results of the study could help bankers and policymakers to take an effective action in order to improve banks’ profitability.
Adolopo, I., Lloydking, R., & Tauringana, V. (2018). Determinants of bank profitability before, during, and after the financial crisis. International Journal of Managerial Finance, 14 (4), 378-398. http://doi.org/10 .1108 /IJMF-07-2017-0148
Ahamed, M. M. (2017). Asset quality, non-interest income, and bank profitability: Evidence from Indian banks. Economic Modeling, 63, 1-14. http://dx.doi.org/10.1016/j.ecomod.2017.01.016
Ahmad, R., Koh, E. H. Y., & Shaharuddin, S. (2016). Determinants of bank profitability: A comparative study of East Asia and Latin America. International Journal of Banking, Accounting and Finance, 7(1), 34-51. doi: 10.1504/IJBAAF.2016.079163
Almaqtari, F. A., Al-Homaid, E. A., Tobash, M. I., & Faharan, N. H. (2018). The determinants of bank profitability of Indian commercial banks: A panel data approach. International Journal of Finance and Economics, 24, 168-185. http://doi.org/10.1002/ijfe.1655
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 & Money, 18, 121-136. doi: 10.1016/j.intfin.2006.07.001
Bhattarai, Y. R. (2016). Effects of credit risk on the performance of Nepalese commercial banks. Economic Review, 28(1), 41-64. https://www.nrb.org.np/ecorev/articles/vol28-1_art3.pdf
Bitar, M., Pukthuanthong, K., & Walker, T. (2018). The effect of capital ratios on the risk, efficiency and profitability of banks: Evidence from OECD countries. Journal of International Financial Markets, Institutions & money, 53, 227-262. http://doi.org/10.1016/j.intfin.2017.12.002
Bitar, M., Saad, W., & Benlemlih, M. (2016). Bank risk and performance in the MENA region: The importance of capital requirement. Economic System, 40, 398-421. http://dx.doi.org/10.1016/j.ecosys.2015.12.001
Bossone, B., Lee, J. (2004). In finance size matters: The “systematic scale economises” hypothesis. IMF Econ Rev, 51,19-46. http://doi.org/10.2307/30035861
Brigham, E. F., & Houston, J. F. (2013). Fundamental of financial management. New Delhi, India: Cengage Learning India Private Limited.
Dietrich, A., & wanzenried, G. (2014). The determinants of commercial banking profitability in low-middle and high-income countries. The Quarterly Review of Economics and Finance, 54, 337-354. http://dx.doi.org/10.1016/j.qref.2014.03.001
Fang, J., Lau, C. M., Lu, Z., Tan, Y., & Zhang, H. (2019). Bank performance in China: A perspective from bank efficiency, risk taking, and market competition. Pacific- Basin Finance Journal, 56, 290-309. http://dx.doi.org/10.1016/j.pacfin.2019.06.011
Karimzadeh, M., Akhtar, S. M. J., & Karimzadeh, B. (2013). Determinants of profitability of banking sector in India. Transition Studies Review, 20, 211-219. doi: 10.1007/s11300-013-0284-4
Kolb, R. W., & Rodri’guez, R. J. (1996). Financial institutes and markets. USA: Blackwell Business.
Lind, D. A., Marchal, W. G., & Wathen, S. A. (2006). Basic statistics for business and statistics. New York, NY: McGraw Hill.
Messai, A. S., Gallali, M. I., & Jouini, F. (2015). Determinants of bank profitability in Western European countries: Evidence from system GMM estimates. International Business Research, 8 (7), 30-42. http://dx.doi.org/10.5539/jbr.v8n7p30
Miskin, F. S., & Eakins, S. G. (2012). Financial markets and institutions. NewDelhi, India: Dorling Kindersley India.
Nepal Rastra Bank. (2018) . Banking supervision report, 2017. Kathmandu, Nepal: Bank Supervision Department.
Nepal Rastra Bank. (2019). Macroeconomic indicators of Nepal. Retrieved from https://www.nrb.org.np /red /publications/economic_bulletin/Macroeconomic_Indicators_of_Nepal--2019-11_(November_2019)-new.pdf
Nepal Ratra Bank. (2068). Merger and Acquisition bylaws, 2068. Retrieved from https://www.nrb.org.np /bfr/circular/2067 -68/2067_68_(Notice)--4-%20Attachment-%20Merger%20Bylaws,%202068.pdf
Paolucci, E. M. G. (2016). The determinants of bank profitability: Empirical evidence from European banking sector. Journal of Financial Reporting and Accounting, 14 (1), 86-115. http://dx.doi.org/10.1108/JFRA-05-2015-0060
Petria, N., Capraru, B., & Ihnatov, I. (2015). Determinants of banks profitability: Evidence from EU 27 banking systems. Procedia Economics and Finance, 20, 518-524. https//doi.org/10.1016/S2212-5671(15)00104-5
Pradhan, R. S. (2016). Bank specific and macroeconomic determinants of bank profitability: A case of Nepal. Available at SSRN: http://dx.doi.org/10.2139/ssrn.2793484
Samad, A. (2008). Market structure, conduct, and performance: Evidence from the Bangladesh banking industry. Journal of Asian Economics, 19, 181-193. doi: 10.1016/j.asieco.2007.12.007
sSaona, P. (2016). Intra-and extra-bank determinants of Latin American Banks’ profitability. International Review of Economics and Finance, 45, 197-214. http://dx.doi.org.10.1016/j.iref.2016.06.004
Sinha, P., & Shrama, S. (2016). Determinants of bank profits and its persistence in Indian banks: A study in a dynamic panel data framework. International Journal of System Assurance Engineering and management, 7, 35-46. doi: 10.1007/s13198-015-0388-9
Sufian, F., & Habibullah, M. (2009). The impact of Asian financial crisis on bank performance: Empirical evidence form Thailand and Malaysia. Savings and Development, 33(2), 153-181. Retrieved January 15, 2020, from www.jstor.org/stable/41406491
Sufian, F., & Kamarudhin, F. (2012). Bank-specific and macroeconomic determinants of profitability of Bangladesh’s commercial banks. The Bangladesh Development Studies, 35 (4), 1-28. Retrieved from www.jstor.org/stable/41968840
Tan, Y. (2016). The impact of risk and competition on bank profitability in China. Journal of International Financial Markets, Institution & Money, 40, 85-110. http://dx.doi.org.10.1016/j.intfin.2015.09.003
Tan, Y. (2017). The impact of competition and shadow banking on profitability: Evidence from the Chinese banking industry. North American Journal of Economics and Finance, 42, 89-106. http://dx.doi.org/10.1016/j.najef.2017.07.007
Tan, Y., & Floros, C. (2014). Risk, profitability, and competition: Evidence from the Chinese banking industry. The Journal of Developing Areas, 48(3), 303-319. Retrieved from www.jstor.org/stable/24241240
Tan, Y., & Floros, C. (2014). Risk, profitability, and competition: Evidence from the Chinese banking industry. The Journal of Developing Areas, 48(3), 303-319. Retrieved January 15, 2020, from www.jstor.org/stable/24241240
Tiko, J., Skvarciany, V., & Jureviciene, D. (2015). Drivers of bank profitability: Case of Latvia and Lithunia. Intellectual Economics, 9, 120-129. http://dx.doi.org/10.1016/j.intele.2016.02.003
Trad, N., Trabelsi, M. A., & Goux, J. F. (2017). Risk and profitability of Islamic banks: A religious or an alternative solution?. European Research on Management and Business Economics, 23, 40-45. http://dx.doi.org.10.1016/j.iedeen.2016.09.001