Impact of Bank Liquidity and Macroeconomic Determinants on Profitability of Private Commercial Banks in Bangladesh: A panel Data Analysis

Abstract

This study investigates the impact of bank liquidity and macroeconomic factors on the profitability of private commercial banks in Bangladesh, using data from 10 banks over the period 2014–2023. Return on Assets (ROA) and Return on Equity (ROE) serve as dependent variables, and bank specific variables such as Current Ratio, Deposit Growth Rate, Capital Adequacy Ratio, Total Loan to Total Deposit Ratio, Operating Expenses to Total Assets Ratio, Size of the Bank measured with log of Total Assets, Non-Performing Loans to Total Loans Ratio, along with macroeconomic variables such as GDP Growth Rate, Inflation Rate, Interest Rate Spread, Money Supply Growth Rate, as independent variables. Four regression models—Pooled OLS, Fixed Effects, Random Effects, and GLS—were applied, alongside Model Specification Test, Diagnostic Tests for Heteroscedasticity, Autocorrelation, Multicollinearity and Unit Root Test to validate the econometric estimations. Based on the estimated outputs, the GLS model was identified as the best-fitting model as there was heteroscedasticity and autocorrelation problem in data set. According to GLS model, Current Ratio, Non-performing Loan to Total Loan Ratio, Total Loan to Total Deposit Ratio and Bank Size have significant negative impact on profitability, while Operating Expenses to Assets Ratio and Interest Rate Spread have significant positive affect on profitability of banks. By exploring the relationship between internal liquidity measures and external macroeconomic determinants with profitability, this research aims to provide valuable insights for bank managers, policymakers, and regulators. The findings are expected to support informed decision-making processes and contribute to strengthening the profitability and resilience of the private banking sector in Bangladesh.