Effect of Credit Risk on Commercial Banks’ Profitability: A Case Study of Bangladesh

Abstract

Purpose of the Study: Credit risk is the risk of default by the borrower. The major cause of a bank’s failure is the lack of proper credit risk management (CRM). The study examined the impact of the credit risk on the profitability of the public and private sector banks in Bangladesh. Materials and Methods: A total of 20 public and private commercial banks (CB) were selected for a period of 5 years (2014–2018). The sample banks are AB Bank, Agrani Bank, Brac Bank, Bank Asia, The Citi Bank, Dhaka Bank, Dutch Bangla Bank, Exim Bank, First Security Islamic Bank, IFIC Bank, Islami Bank Bangladesh, Janata Bank, Mercantile Bank, Mutual Trust Bank, National Bank’, NCC Bank, Prime Bank, Rupali Bank, Sonali Bank, and South East Bank Limited. The study was carried out using secondary data sourced from the annual reports. Findings: The study found that return on assets (ROA) showed statistically significant positive relationship with capital adequacy ratio (CAR) as well as cost to loan assets ratio. On the other side, ROA and non-performing loans (NPL) as well as bank size revealed a significant negative relationship. However, cash reserve ratio proved statistically insignificant relationship with ROA. Hence, the study concluded that among five credit risk indicators CAR, NPL, and bank size were the most important predictor of the CB’ profitability. Implications: The implication of the study is that the respective authorities of the CB of Bangladesh could use the findings to take necessary actions regarding the CRM.