This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Authors retain the copyright without restrictions for their published content in this journal. HSSR is a SHERPA ROMEO Green Journal.
DETERMINANTS OF BANK PROFITABILITY: EMPIRICAL EVIDENCE FROM A PACIFIC SMALL ISLAND DEVELOPING STATE
Corresponding Author(s) : Bimal Krishna
Humanities & Social Sciences Reviews,
Vol. 9 No. 3 (2021): May
Purpose: This study aims to investigate the determinants of profitability of the Fijian banks for the 2001-2019 periods. Using several bank-specific and external variables, and covering nineteen years, researchers measure the impact of each variable on Return on Average Assets, Return on Average Equity, and Net Interest Margin.
Methodology: The sample of this study comprises five commercial banks and two credit financiers. Purposive sampling is employed resulting in 133 audited financial statements. Stata version 16 is used for multivariate econometric analysis and hypothesis testing.
Main Findings: The results of this research show that bank size, risk, and exchange rate positively impacts bank profitability while management efficiency, broad money supply, and quality of regulation negatively affect profitability. On the other hand, the level of liquidity, economic growth, and inflation do not have any impact on profitability.
Application of this study: The findings of this study can be of significance for regulators as well as financial institutions in policy development and market oversight to ensure the sustainability of financial institutions.
Novelty/Originality of this study: Few studies have so far been carried out on the banking sector in Fiji with only one focusing on profitability determinants. This study, using accounting financial ratios and several macroeconomic variables is unique in the sense that it uses several external variables not considered previously.
Abdullah, M. N., Parvez, K., Akther, S., & Ayreen, S. (2014). Bank specific, industry specific and macroeconomic determinants of commercial bank profitability: A case of Bangladesh. World Journal of Social Sciences, 4(3), 82–96. https://doi.org/10.18488/journal.1006.2019.92.174.183 DOI: https://doi.org/10.18488/journal.1006.2019.92.174.183
Abreu, M., & Mendes, V. (2002). Commercial bank interest margins and profitability: Evidence from some EU countries. Pan-European Conference Jointly Organised by the IEFS-UK & University of Macedonia Economic & Social Sciences, Thessaloniki, Greece, May, JANUARY, 1–11. http://www.iefs.org.uk/Papers/Abreu.pdf
Aguilera, R. V., & Jackson, G. (2010). Comparative and international corporate governance. Academy of Management Annals, 4(1), 485–556. https://doi.org/10.1080/19416520.2010.495525 DOI: https://doi.org/10.5465/19416520.2010.495525
Alhadeff, D., & Alhadeff, C. (1964). Growth of large banks, 1930-1960. The Review of Economics and Statistics, 46(4), 356–363. DOI: https://doi.org/10.2307/1924043
Al-Matari, E. M. (2021). The determinants of bank profitability of GCC: The role of bank liquidity as moderating variable—further analysis. International Journal of Finance and Economics, August 2020, 1–13. https://doi.org/10.1002/ijfe.2485 DOI: https://doi.org/10.1002/ijfe.2485
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 and Money, 18(2). https://doi.org/10.1016/j.intfin.2006.07.001 DOI: https://doi.org/10.1016/j.intfin.2006.07.001
Ayaydin, H., & Aykut, K. (2014). The effect of bank capital on profitability and risk in Turkish banking. International Journal of Business and Social Science, 5(1). http://www.ijbssnet.com/journals/Vol_5_N o_1_January_2014/29.pdf
Baltagi, B. H. (2005). Econometric analysis of panel data. John Wiley & Sons Inc.
Baltagi, B. H., Feng, Q., & Kao, C. (2012). A Lagrange Multiplier test for cross-sectional dependence in a fixed effects panel data model. Journal of Econometrics, 170(1), 164–177. https://doi.org/10.1016/j.jeconom .2012.04.004 DOI: https://doi.org/10.1016/j.jeconom.2012.04.004
Bashir, A.-H. (2003). Determinants of profitability in Islamic banks: Some evidence from the Middle-East. Islamic Economic Studies, 11–1(March), 32–57.
Baum, C. F. (2000). XTTEST3: Stata module to compute Modified Wald statistic for groupwise heteroskedasticity. Statistical Software Components, November 2000. https://ideas.repec.org/c/boc/ bocode/s414801.html
Berger, A. N. (1995). The profit-structure relationship in banking - tests of market-power and efficient-structure hypotheses. Journal of Money, Credit and Banking, 27(2). https://doi.org/10.2307/2077876 DOI: https://doi.org/10.2307/2077876
Borio, C., Gambacorta, L., & Hofmann, B. (2015). The influence of monetary policy on bank profitability. International Finance, 20(1), 48–63. https://doi.org/https://doi.org/10.1111/infi.12104 DOI: https://doi.org/10.1111/infi.12104
Bourke, P. (1989). Concentration and other determinants of bank profitability in Europe, North America and Australia. Journal of Banking & Finance, 13(1). https://doi.org/10.1016/0378-4266(89)90020-4 DOI: https://doi.org/10.1016/0378-4266(89)90020-4
Breusch, T. S., & Pagan, A. R. (1980). The Lagrange Multiplier Test and its applications to model specification in econometrics. The Review of Economic Studies, 47(1), 239–253. https://doi.org/10.2307/2297111 DOI: https://doi.org/10.2307/2297111
Bryman, A., & Cramer, D. (2001). Quantitative data analysis with SPSS release 10 for windows: A guide for social scientists. In quantitative data analysis with SPSS release 10 for windows: A guide for social scientists. Routledge. https://doi.org/10.4324/9780203471548 DOI: https://doi.org/10.4324/9780203471548
Demirguc-Kunt, A., & Huizinga, H. (1999). Determinants of commercial bank interest margins and profitability: Some international evidence. The World Bank Economic Review, 13(2). https://doi.org/10.109 3/wber/13.2.379 DOI: https://doi.org/10.1093/wber/13.2.379
Dohoo, I. R., Ducrot, C., Fourichon, C., Donald, A., & Hurnik, D. (1997). An overview of techniques for dealing with large numbers of independent variables in epidemiologic studies. Preventive Veterinary Medicine, 29(3), 221–239. https://doi.org/10.1016/s0167-5877(96)01074-4 DOI: https://doi.org/10.1016/S0167-5877(96)01074-4
Driscoll, J., & Kraay, A. (1998). Consistent covariance matrix estimation with spatially dependent panel data. The Review of Economics and Statistics, 80(4), 549–560. https://econpapers.repec.org/RePEc:tpr:rest at:v:80:y:1998:i:4:p:549-560 DOI: https://doi.org/10.1162/003465398557825
Elhussein, N. H. A., & Onsma, O. E. E. (2019). Exchange rate fluctuations and financial performance of banks: Evidence from Sudan. International Journal of Economics and Finance, 11(12), 15. https://doi.org/10.553 9/ijef.v11n12p15 DOI: https://doi.org/10.5539/ijef.v11n12p15
Farooq, M., Khan, S., Atique Siddiqui, A., Tariq Khan, M., & Kamran Khan, M. (2021). Determinants of profitability: A case of commercial banks in Pakistan. Humanities & Social Sciences Reviews, 9(2), 01–13. https://doi.org/10.18510/hssr.2021.921 DOI: https://doi.org/10.18510/hssr.2021.921
Filatotchev, I., Jackson, G., & Nakajima, C. (2013). Corporate governance and national institutions: A review and emerging research agenda. Asia Pacific Journal of Management, 30(4), 965–986. https://doi.org/10.1007/s1 0490-012-9293-9 DOI: https://doi.org/10.1007/s10490-012-9293-9
Friedman, M. (1970). A Friedman doctrine - The Social responsibility of business is to increase its profits. New York Times Magazine, 6(Newspaper Article).
Gaber, A. (2018). Determinants of banking sector profitability: Empirical evidence from Palestine. International Journal of Economics and Finance, 9(7), 60–68.
Goddard, J. A., Molyneux, P., & Wilson, J. O. S. (2004). Dynamics of growth and profitability in banking. Journal of Money, Credit, and Banking, 36(6). https://doi.org/10.1353/mcb.2005.0015 DOI: https://doi.org/10.1353/mcb.2005.0015
Godfrey, M. (2015). Liquidity and bank performance. International Business & Economics Research Journal (IBER), 14(3), 453. https://doi.org/10.19030/iber.v14i3.9218 DOI: https://doi.org/10.19030/iber.v14i3.9218
Gujarati, D. N. (2007). Basic Econometrics. Tata McGraw–Hill.
Hadri, K. (2000). Testing for stationarity in heterogeneous panel data. The Econometrics Journal, 3(2), 148–161. https://doi.org/https://doi.org/10.1111/1368-423X.00043 DOI: https://doi.org/10.1111/1368-423X.00043
Hair, J. F., Anderson, R. E., Tatham, R. L., & Black, W. C. (1998). Multivariate data analysis with readings. Prentice Hall.
Hakimi, A., & Zaghdoudi, K. (2017). Liquidity risk and bank performance: An empirical test for Tunisian banks. Business and Economic Research, 7(1), 46. https://doi.org/10.5296/ber.v7i1.10524 DOI: https://doi.org/10.5296/ber.v7i1.10524
Harris, R., & Tzavalis, E. (1999). Inference for unit roots in dynamic panels where the time dimension is fixed. Journal of Econometrics, 91(2), 201–226. DOI: https://doi.org/10.1016/S0304-4076(98)00076-1
Hashem, H. Y. (2016). Determinants of Egyptian banking sector profitability: Time-series analysis from 2004-2014. International Journal of Business and Economic Sciences Applied Research, 9(2), 73–78. https://doi.org/10.5539/ijef.v9n7p60
Hassan, M. K., & Bashir, A.H. M. (2012). Determinants of Islamic banking profitability. In Islamic Perspectives on Wealth Creation (Issue April 2014). https://doi.org/10.3366/edinburg h/9780748621002.003.0008
Hoechle, D. (2007). Robust standard errors for panel regressions with cross-sectional dependence. The Stata Journal: Promoting Communications on Statistics and Stata, 7(3).
Hoffmann, P. S. (2011). Determinants of the profitability of the US banking industry. International Journal of Business and Social Science, 2(22). http://www.ijbssnet.com/journals/Vol_2_No_22_December_2011/30.pdf
Hossin, M. S., & Mondol, M. F. (2020). Impact of exchange rate fluctuations on financial performance of state-owned commercial banks in Bangladesh: An empirical study. Noble International Journal of Economics and Financial Research, 5(September), 92–101.
Hung, W.T., Shang, J.K., & Wang, F.C. (2010). Pricing determinants in the hotel industry: Quantile regression analysis. International Journal of Hospitality Management, 29(3), 378–384. https://doi.org/https://doi.org /10.1016/j.ijhm.2009.09.001 DOI: https://doi.org/10.1016/j.ijhm.2009.09.001
Jensen, M. (2001). Value maximisation, stakeholder theory, and the corporate objective function. European Financial Management, 7(3). https://doi.org/10.1111/1468-036X.00158 DOI: https://doi.org/10.1111/1468-036X.00158
Kadioglu, E., Telceken, N., & Ocal, N. (2017). Effect of the asset quality on the bank profitability. International Journal of Economics and Finance, 9(7), 60. https://doi.org/10.5539/ijef.v9n7p60 DOI: https://doi.org/10.5539/ijef.v9n7p60
Khediri, K., & Ben-Khedhiri, H. (2011). Determinants of bank net interest margin in Tunisia: A panel data model. Applied Economics Letters, 18(13), 1267–1271. https://doi.org/10.1080/13504851.2010.534052 DOI: https://doi.org/10.1080/13504851.2010.534052
Khrawish, H. A. (2011). Determinants of commercial banks performance: evidence from Jordan. International Research Journal of Finance and Economics, 5(5), 19–45.
Kosmidou, K. (2008). The determinants of banks’ profits in Greece during the period of EU financial integration. Managerial Finance, 34(3). https://doi.org/10.1108/03074350810848036 DOI: https://doi.org/10.1108/03074350810848036
Kumar, V., Thrikawala, S., & Acharya, S. (2021). Financial inclusion and bank profitability: Evidence from a developed market. Global Finance Journal, 100609. https://doi.org/https://doi.org/10.1016/j.gfj.2021.100609 DOI: https://doi.org/10.1016/j.gfj.2021.100609
Levin, A., Lin, C. F., & Chu, C. S. J. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics, 108(1), 1–24. https://doi.org/10.1016/S0304-4076(01)00098-7 DOI: https://doi.org/10.1016/S0304-4076(01)00098-7
Magee, S., Man, C., & Wright, S. (2021). How executive remuneration responds to guidance : Evidence from the Australian banking industry. Accounting and Finance, 60(5). https://doi.org/10.1111/acfi.12758 DOI: https://doi.org/10.1111/acfi.12758
Maiti, A., & Jana, K. S. (2017). Determinants of profitability of banks in India: A panel data analysis. Scholars Journal of Economics, Business and Management, 4(8A). https://doi.org/DOI:10.21276/sjebm DOI: https://doi.org/10.21276/sjebm
Mansur, I., Zangeneh, H., & Zitz, M. S. (1993). The association between banks’ performance ratios and market-determined measures of risk. Applied Economics, 25(12), 1503–1510. https://doi.org/10.1080/0003684 9300000154 DOI: https://doi.org/10.1080/00036849300000154
Manyok, A. J. (2016). Effects of exchange rate fluctuations on financial performance of commercial banks in South Sudan [Masters dissertation, University of Nairobi]
Mendoza, R., & Rivera, J. P. R. (2017). The effect of credit risk and capital adequacy on the profitability of rural banks in the Philippines. Scientific Annals of Economics and Business, 64(1), 83–96. https://doi.org/10 .1515/saeb-2017-0006 DOI: https://doi.org/10.1515/saeb-2017-0006
Menicucci, E., & Paolucci, G. (2016). The determinants of bank profitability: Empirical evidence from European banking sector. Journal of Financial Reporting and Accounting, 14(1), 86–115. https://doi.org/ 10.1108/JFRA-05-2015-0060 DOI: https://doi.org/10.1108/JFRA-05-2015-0060
Miller, S. M., & Noulas, A. G. (1997). Portfolio mix and large-bank profitability in the USA. Applied Economics, 29(4). https://doi.org/10.1080/000368497326994 DOI: https://doi.org/10.1080/000368497326994
Molyneux, P., & Thornton, J. (1992). Determinants of European bank profitability: A note. Journal of Banking & Finance, 16(6), 1173–1178. https://econpapers.repec.org/RePEc:eee:jbfina:v:16:y:1992:i:6:p:1173-1178 DOI: https://doi.org/10.1016/0378-4266(92)90065-8
Naceur, S. Ben, & Omran, M. (2011). The effects of bank regulations, competition, and financial reforms on banks’ performance. Emerging Markets Review, 12(1). https://doi.org/10.1016/j.ememar.2010.08.002 DOI: https://doi.org/10.1016/j.ememar.2010.08.002
Ngobo, P. V., & Fouda, M. (2012). Is “Good” governance good for business? A cross-national analysis of firms in African countries. Journal of World Business, 47(3), 435–449. https://doi.org/10.1016/j.jwb.2011.05.010 DOI: https://doi.org/10.1016/j.jwb.2011.05.010
Nguyen, T., Locke, S., & Reddy, K. (2015). Ownership concentration and corporate performance from a dynamic perspective: Does national governance quality matter? International Review of Financial Analysis, 41, 148–161. https://doi.org/https://doi.org/10.1016/j.irfa.2015.06.005 DOI: https://doi.org/10.1016/j.irfa.2015.06.005
Obamuyi, T. M. (2013). Determinants of banks’ profitability in a developing economy: Evidence from Nigeria. Organizations and Markets in Emerging Economies, 4(2), 97–111. https://doi.org/10.15388/omee.2 013.4.2.14251 DOI: https://doi.org/10.15388/omee.2013.4.2.14251
Ongore, V. O., & Kusa, G. B. (2013). Determinants of financial performance of commercial banks in Kenya. International Journal of Economics and Financial Issues, 3(1), 237–252.
Özkan, Ö. (2021). Analysis Of the macroeconomic factors determining the asset profitability of the Turkish banking system in the period of 2010-2020. Journal of Accounting, Finance and Auditing Studies, 7(2), 64–79. https://doi.org/10.32602/jafas.2021.013 DOI: https://doi.org/10.32602/jafas.2021.013
Pasiouras, F., & Kosmidou, K. (2007). Factors influencing the profitability of domestic and foreign commercial banks in the European Union. Research in International Business and Finance, 21(2). https://doi.org/1 0.1016/j.ribaf.2006.03.007 DOI: https://doi.org/10.1016/j.ribaf.2006.03.007
Quan, L. J., Ramasamy, S., Rasiah, D., Yen, Y. Y., & Pillay, S. D. (2019). Determinants of Islamic banking performance: An empirical study in Malaysia (2007 to 2016). Humanities and Social Sciences Reviews, 7(6), 380–401. https://doi.org/10.18510/hssr.2019.7664 DOI: https://doi.org/10.18510/hssr.2019.7664
Rahman, M. M., Hamid, M. K., & Khan, M. A. M. (2015). Determinants of bank profitability: Empirical evidence from Bangladesh. International Journal of Business and Management, 10(8). https://doi.org /10.5539/ijbm.v10n8p135 DOI: https://doi.org/10.5539/ijbm.v10n8p135
Sahyouni, A., & Wang, M. (2019). Liquidity creation and bank performance: Evidence from MENA. ISRA International Journal of Islamic Finance, 11(1), 27–45. https://doi.org/10.1108/IJIF-01-2018-0009 DOI: https://doi.org/10.1108/IJIF-01-2018-0009
Sanni, M., Salami, A. A., & Uthman, A. B. (2020). Determinants of bank performance in Nigeria: do they behave differently with risk-adjusted returns? Studia Universitatis Vasile Goldis Arad – Economics Series, 30(3), 1–34. https://econpapers.repec.org/RePEc:vrs:suvges:v:30:y:2020:i:3:p:1-34:n:1 DOI: https://doi.org/10.2478/sues-2020-0015
Saunders, A., & Walter, I. (1994). Universal banking in the United States: What could we gain? What could we lose? Southern Economic Journal, 61(1), 231. https://doi.org/10.2307/1060155 DOI: https://doi.org/10.2307/1060155
Sharma, P., & Gounder, N. (2012). Profitability determinants of deposit institutions in small, underdeveloped financial systems: The case of Fiji. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2187251 DOI: https://doi.org/10.2139/ssrn.2187251
Short, B. K. (1979). The relation between commercial bank profit rates and banking concentration in Canada, Western Europe, and Japan. Journal of Banking and Finance, 3(3), 209–219. https://doi.org/10.1016/0378-4266(79)90016-5 DOI: https://doi.org/10.1016/0378-4266(79)90016-5
Smirlock, M. (1985). Evidence on the (Non) Relationship between concentration and profitability in Banking. Journal of Money, Credit and Banking, 17(1), 69–83. https://doi.org/10.2307/1992507 DOI: https://doi.org/10.2307/1992507
Srairi, S. A. (2009). Factors influencing the profitability of conventional banks and Islamic banks in GCC countries. Review of Islamic Economics, 13(1), 5–30.
Staikouras, C. K., & Wood, G. E. (2004). The determinants of European bank profitability. International Business & Economics Research Journal (IBER), 3(6), 57–68. https://doi.org/10.19030/iber.v3i6.3699 DOI: https://doi.org/10.19030/iber.v3i6.3699
Sufian, F. (2009). Determinants of bank profitability in a developing economy: Empirical evidence from the china banking sector. Journal of Asia-Pacific Business, 10(4). https://doi.org/10.1080/10599230903340205 DOI: https://doi.org/10.1080/10599230903340205
Sufian, F., & Chong, R. R. (2008). Determinants of bank profitability in a developing economy: Empirical evidence from the philipinnes. Asian Academy of Management Journal of Accounting and Finance (AAMJAF), 4(2), 91–112. https://ideas.repec.org/a/usm/journl/aamjaf00402_91-112.html
Sultan, K., Ahmed, R. R., Ameen, F. M., Kumar, D., & Singh, M. (2020). The effect of macroeconomic & bank specific factors on banks profitability: An empirical evidence from banking industry of Pakistan. Humanities and Social Sciences Reviews, 8(3), 635–645. https://doi.org/10.18510/HSSR.2020.8368 DOI: https://doi.org/10.18510/hssr.2020.8368
Tabak, B. M., Moreira, T. B. S., Fazio, D. M., Cavalcanti, A. L. C., & De Moura Cunha, G. H. (2016). Monetary expansion and the banking lending channel. PLoS ONE, 11(10). https://doi.org/10.1371/journ al.pone.0164338 DOI: https://doi.org/10.1371/journal.pone.0164338
Tan, Y., & Floros, C. (2012). Bank profitability and inflation: The case of China. Journal of Economic Studies, 39(6), 675–696. https://doi.org/10.1108/01443581211274610 DOI: https://doi.org/10.1108/01443581211274610
Tektas, A., Ozkan‐Gunay, E. N., & Gunay, G. (2005). Asset and liability management in financial crisis. The Journal of Risk Finance, 6(2), 135–149. https://doi.org/10.1108/15265940510585806 DOI: https://doi.org/10.1108/15265940510585806
Uwazie, I. U., & Aina, T. H. (2015). Monetary policy variables and commercial bank loans: A causality approach. Research Journal of Finance and Accounting, 6, 35–42.
Wong, T. C., Wong, J., & Leung, P. (2008). The foreign exchange exposure of Chinese banks. China Economic Review, 20(2). https://doi.org/10.2139/ssrn.1485198 DOI: https://doi.org/10.1016/j.chieco.2009.03.003
Wooldridge, J. (2002). Econometric Analysis of Cross Section and Panel Data. The MIT Press.
Yao, H., Haris, M., & Tariq, G. (2018). Profitability determinants of financial institutions: evidence from banks in Pakistan. International Journal of Financial Studies, 6(2), 53. https://doi.org/10.3390/ijfs6020053 DOI: https://doi.org/10.3390/ijfs6020053