An Empirical Study on Internal and External Factors Affecting the Profitability of Commercial Banks in Bangladesh.

Abstract

The banking sector of Bangladesh plays a crucial role in promoting economic growth, financial stability, and overall development. However, in recent years, commercial banks have faced various challenges, particularly in maintaining profitability due to internal inefficiencies and changing macroeconomic conditions. This report, titled “An Empirical Study on Internal and External Factors Affecting the Profitability of Commercial Banks in Bangladesh” aims to examine how selected internal and external factors influence bank profitability. The study is based on secondary data collected from the annual reports of five commercial banks—Sonali Bank PLC, IFIC Bank PLC, Islami Bank Bangladesh PLC, Janata Bank PLC, and Rupali Bank PLC—covering a five-year period from 2019 to 2023. Return on Assets (ROA) is used as the dependent variable to measure profitability, while Non-Performing Loans (NPL), Liquidity Ratio (LIQ), Cost-to-Income Ratio (CIR), Bank Size (SIZE), Gross Domestic Product (GDP), Interest Rate (INT), and Inflation Rate (INF) are used as independent variables. The analysis is conducted using Stata and Excel. Chapter One introduces the background of the study, highlighting the importance of bank profitability in ensuring financial stability and economic growth. It outlines the research problem, objectives, scope, and research questions focusing on identifying key determinants of bank performance. Chapter Two presents the literature review, summarizing previous empirical studies on bank profitability. It discusses both bank-specific and macroeconomic factors and provides a theoretical foundation for the study. Chapter Three describes the research methodology, including research design, data sources, sampling, and analytical techniques. The study uses secondary data and applies econometric methods such as OLS and panel data analysis (Fixed Effects and Random Effects models). Chapter Four provides data analysis and findings. Descriptive statistics, correlation analysis, and regression results reveal that NPL negatively affects profitability, while liquidity, GDP, and inflation have positive impacts. Diagnostic tests confirm the reliability of the model, and the Random Effects model is identified as the most appropriate. Chapter Five presents the conclusion and recommendations. The findings emphasize the importance of managing non-performing loans and maintaining optimal liquidity. Practical recommendations are provided for improving bank performance and policy effectiveness. Chapter Six highlights the limitations of the study and suggests directions for future research, including expanding the dataset, incorporating additional variables, and applying advanced methodologies. Overall, the study concludes that internal management efficiency, particularly in credit risk and liquidity management, plays a crucial role in determining bank profitability in Bangladesh.