“Analysis of Internal and External Determinants on the Profitability of Commercial Banks in Bangladesh”

Abstract

Using Return on Assets (ROA), this study looks at how economic and company-specific factors affect the profitability of 15 commercial banks in Bangladesh. A key measure of banking performance, profitability is influenced by both macroeconomic variables like GDP growth and internal factors like bank size, operating expense to total assets ratio, capital adequacy ratio, and total loans to total assets ratio. The study employs econometric techniques such as Pooled OLS, Fixed Effects, and Random Effects to ensure accurate estimation and address diagnostic concerns like heteroskedasticity, autocorrelation, and cross-sectional dependence using panel data spanning the years 2009–2023. Based on empirical evidence, bank profitability is significantly influenced by both internal and external factors. Internal elements such as total loan to total assets, Operating Expense Ratios significantly affect ROA, emphasizing that operational inefficiencies are a crucial factor in diminished profitability. Macroeconomic factors such as GDP growth affect profitability, indicating the vital role of external economic stability in bank performance. The research indicates that profitability within the banking industry results from a combination of operational effectiveness and overall economic stability. Regulatory bodies and bank executives ought to prioritize improving internal efficiencies, tackling non-performing loans, and utilizing positive economic circumstances to boost profitability. These findings contribute to the existing body of knowledge by bridging the gap between more general economic factors and bank-specific elements, offering practical insights for long-term financial progress.