Abstract:
This study investigates the impact of capital adequacy and other financial and macroeconomic
variables on the profitability of private commercial banks in Bangladesh. Using panel data
collected from 10 listed banks over the period 2014 to 2023, the analysis employs various
econometric techniques including Fixed Effects, Random Effects, Generalized Least Squares
(GLS), and Pooled Ordinary Least Squares (OLS). Profitability is measured by Return on Assets
(ROA) and Return on Equity (ROE), while independent variables include Capital Adequacy Ratio
(CAR), Non-Performing Loan (NPL) ratio, Equity Capital to Total Asset Ratio, Bank Size, Total
Loan to Total Deposit ratio, GDP growth, inflation, and interest rate spread. The findings reveal
that the Capital Adequacy Ratio shows limited significance in simpler models but becomes
positively associated with profitability in the GLS model, suggesting its conditional importance.
The NPL ratio and high equity levels negatively affect profitability, while interest rate spread and
bank size are significant positive contributors. Macroeconomic variables such as GDP growth
show a mild positive impact, while inflation negatively influences bank earnings. Diagnostic tests
confirm the presence of heteroscedasticity, autocorrelation, and cross-sectional dependence
methods. Overall, the study concludes that bank profitability is shaped by a combination of internal
financial practices and external economic conditions. It recommends that banks maintain an
optimal capital structure, improve credit risk management, use digital technology for efficiency,
and align financial strategies with economic trends. The research contributes to a deeper
understanding of how capital adequacy and related variables influence the performance of
commercial banks in emerging economies.
