Bank-specific Variables Research Articles

TURKISH BANKS' NON-INTEREST INCOME AND THE IMPACT OF THE CBRT REGULATIONS

Banks, which serve to facilitate the transfer of funds between deficit and surplus positions, seek to maximize their income in order to maximize their profits. In order to achieve this, banks attach great importance to the generation of non-interest income as well as interest and fee income, which represent their primary sources of revenue. In this study, we analyze the impact of potential determinants of non-interest income in the Turkish banking sector on non- interest income using a panel data set. Accordingly, this study analyses the determinants of non-interest income in the Turkish banking sector using a data set of 19 banks and 11 years. The analysis demonstrates that bank-specific variables, including the net interest margin, loans-to-assets ratio, asset growth rate, capital adequacy ratio, return on equity, and the inflation rate, significantly and negatively impact non-interest income. In contrast, changes in the return on assets and gross domestic product have a positive and significant effect on primary income. Furthermore, the CBRT's regulations on fees, charges and commissions in 2020 are anticipated to influence the non-interest income ratio of the Turkish banking sector, particularly that of public banks. Moreover, the study may also contribute to the academic literature on potential regulatory policies that could impact the primary income of banks.

FACTORS SHAPING LIQUIDITY DYNAMICS IN THE BANKING SECTOR OF PAKISTAN

Purpose: This study aims to investigate the liquidity creation determinants in the banking sector of Pakistan. Design/Methodology: Panel data from 24 banks is used for the period of 12 years (2011-2022). The impact of macroeconomic variables (economic growth and inflation) and bank-specific variables (income diversification, bank capital and bank size), is checked on liquidity creation. Liquidity creation is measured by the BB technique introduced by Berger and Bouwman (2009). The generalized Method of the moment (GMM) is used as a statistical technique to test the causal relationship among the variables of interest. Findings: The outcomes of this study show that among three bank-specific variables two variables; bank capital and size are significantly linked with liquidity creation. Inflation and economic growth are also significantly related to liquidity creation. The relationship between income diversification and liquidity creation is insignificant. Implications: This research will help to propose changes in current banking regulations and economic factors to improve liquidity creation. This research will also help the policymakers and managers of banks in developing policies and making decisions regarding the creation of liquidity. Originality: To the best of the author's knowledge this is the first study that emphasizes the determinants of liquidity creation in the banking sector of Pakistan.

Unveiling the impact of COVID-19 on Small Finance Banks in India: An in-depth econometric analysis

This study assesses the performance of Small Finance Banks in India, focusing on their efficiency in the post-COVID-19 period from 2019 to 2023. It explores the influence of bank-specific and macroeconomic factors on the efficiency of Small Finance Banks, with the aim of understanding their role in promoting financial inclusion. The research employs a two-stage Data Envelopment Analysis (DEA) framework to evaluate the efficiency of 10 selected Small Finance Banks. It incorporates both bank-specific variables (such as capital adequacy ratio, credit-deposit ratio, and liquidity ratio) and macroeconomic factors (GDP and inflation) in a Tobit regression model to analyze their influence on efficiency. The study reveals that the majority of Small Finance Banks remained resilient during the pandemic, consistently achieving high efficiency scores, except for a slight dip in 2020–2021 due to lockdown measures. Bank-specific factors indicate a converse association between capital adequacy ratio and efficiency, while liquidity ratio and credit-deposit ratio positively correlate with efficiency. Macro factors, including GDP and inflation, have minimal impact on Small Finance Banks efficiency. This study provides a comprehensive assessment of Small Finance Banks’ performance post-COVID-19, shedding light on the factors influencing their efficiency. It offers valuable insights for policymakers and Small Finance Banks to strengthen their role in advancing financial inclusion in India, contributing to a more inclusive and dynamic financial landscape. The findings suggest that Small Finance Banks should focus on expanding their influence in niche segments by increasing assets, deposits, and revenue streams while managing operating expenses and liquidity risks. Listing on the stock exchange and active policy support for research initiatives can enhance the Small Finance Banks ecosystem and drive financial inclusion.

The influence of bank-specific variables on banks’ stability: Evidence from Saudi Arabia

The goal of this study is to find out what makes Saudi Arabian banks unstable by using a panel data analysis with ten banks’ carefully chosen annual data from 2009 to 2022. Based on the fixed effect model, this study indicates that Saudi Arabian bank stability is unaffected by liquidity risk but is statistically and negatively impacted by credit risk and bank size. Conversely, capital adequacy and funding risk positively and statistically impact bank stability in Saudi Arabia. In light of these findings, we strongly recommend making capital adequacy requirements obligatory for bank management, given their beneficial effect on bank stability. This study recommended that bank management adopt practices such as safe loan provision and prompt customer repayment to mitigate credit risk. Bank managers have to guarantee liquidity adequacy in their banks and improve credit standards by increasing client supplemental requirements. While our study found that liquidity risk does not directly affect banks' financial stability, we propose that bank management should also focus on finding effective ways to generate client deposits to enhance financial stability further.

Determinants of Bank Lending to Microenterprises: Evidence from Vietnam’s Commercial Banks

Microenterprises largely rely on bank loans for external funding. In an emerging market such as Vietnam, the role of commercial banks in providing loans to micro-firms is even more crucial. The present paper examines the question of what the determinants of bank lending to microenterprises are. This study conducts a two-step system generalised method of moments (GMM) estimation to investigate the relationship between bank-specific variables, macroeconomic factors, and bank industry characteristics on bank loans to microenterprises using the panel data from 26 Vietnamese commercial banks from 2011 to 2020. The results show that the microenterprise loan growth rate depends on bank-specific variables and macroeconomic factors. However, bank-specific variables and banking industry characteristics determine microenterprise lending propensity. This paper also contributes to the debate concerning microenterprise lending as the best approach, and which type of commercial banks would most often choose this alternative. Interestingly, it was demonstrated that larger banks had higher microenterprise loan growth rates, and smaller banks experienced a greater proportion of microenterprise loans in their total business loans.

Funding Liquidity Risk, Bank-Specific Variables And Profitability Of Islamic Rural Banks

This research investigates the impact of funding liquidity risk and some bank-specific variables on the profitability of Islamic rural banks in Indonesia, for the case of Islamic rural banks located on Sumatera Island. This study examines 41 Islamic rural banks with quarterly data from 2019: Q1 to 2023: Q4. Panel regression with unbalanced panel data is then employed. For further analysis, we make an interaction between funding liquidity risk and bank size to investigate whether large banks benefit from their size associated with the impact of funding liquidity risk on profitability. Our results confirm that funding liquidity risk lowers profitability. More importantly, large Islamic rural banks face less risk associated with the impact of funding liquidity risk on profitability than small Islamic rural banks. Results also highlight the importance of strong bank fundamentals such as efficiency in supporting profitability. This research has two important implications, theoretically and practically. First, from a practical perspective, funding liquidity risk reduces profits because Islamic rural banks dare to take investment risks to obtain high income. Second, Islamic rural banks must be able to manage maturity mismatch so that the negative impact of funding liquidity risk on profits can be minimized.

Assessing the Determinants of Bank Interest Rate Spread: Evidence From Western Balkan Countries

This study investigates the effect of macroeconomic and bank-specific factors on the bank interest rate spread (IRS) of six Western Balkan countries (referred to as WB6). We applied the Panel Vector Autoregression (Panel VAR) model to separately analyze the impact of these two sets of factors for 2005 to 2022 using two-panel datasets from 110 banks. The results from the two models show that the IRS is significantly influenced by GDP per capita and the unemployment rate, while other factors, such as bank concentration, performance indicators, and non-performing loans, show limited direct effects. The study identifies a notable gap in the existing literature by emphasizing how macroeconomic and bank-specific variables, particularly in transition economies, can simultaneously affect the IRS. The research highlights the distinctive financial dynamics within the WB6 countries and the relevance of comprehending the region’s banking sector characteristics. It contributes to academic and policy discussions on the significance of financial stability and market competitiveness in determining the bank IRS. The findings can be helpful for banking regulators and policymakers in the Western Balkans seeking to foster an efficient and competitive banking environment. JEL Classification: C33, E43, G21.

The Determinants of Liquidity: A Comparison of Islamic and Conventional Banks Covering the COVID-19 Period

Banking and risk are synonymous concepts. The risk concepts for both conventional and Islamic banks are broadly similar, and liquidity risk is among the most important risks that all banks are exposed to. The management process of liquidity risk, which arises when banks do not have enough assets to meet their liabilities at maturity, may differ in conventional and Islamic banks. This study aims to present a comparative analysis of the liquidity determinants of conventional and Islamic banks operating in Turkey. Using the data of 3 Islamic and 17 conventional banks for the period between 2011Q1-2022Q2, the analysis, which also aims to see the short and long-term effects, concludes that the determinants of liquidity risk for conventional and Islamic banks are largely similar. However, the liquidity of Islamic banks is more sensitive to bank-specific variables. The findings showed that Islamic banks, which cannot use all of the conventional liquidity management tools in the liquidity management process for different reasons, have to hold higher liquid assets than conventional banks in the short term, even if they are balanced in the long term.

Stability and Performance of Conventional and Sharia Banking in Indonesia Before and After the Covid-19 Pandemic

This study examines the impact of the COVID-19 outbreak on the performance and stability of Indonesia's dual banking system. Our sample includes the top 20 banks by assets, both conventional and sharia, from 2018 Q1 to 2023 Q3. Data for conventional banks is obtained from Bloomberg, while data for Islamic banks is sourced from each bank's official website. We use ROA, ROE, and NIM as performance variables and Z-Score and NPL as stability variables. External factors such as GDP, Inflation, BI Rate, and Exchange Rate serve as independent variables, while bank-specific variables act as controls. Panel data regression is used to determine causal relationships between these factors and banking performance and stability. We also compare bank performance and stability before and after COVID-19 using the Mann-Whitney Test. Findings indicate that the pandemic significantly affected conventional banks' Z-Score, NPL, ROA, ROE, and NIM, while only NPL was significantly affected in sharia banks. The results highlight the significant impact of GDP, exchange rate, and BI Rate on banking variables, while inflation had no effect. The type of bank significantly influences performance but not stability.

Interpersonal population diversity in the bank boardroom and corporate misconduct

PurposeThis research empirically establishes that the interpersonal population diversity of executive board members partly explains the differences in financial misconduct across US banks. It advances the hypothesis that heterogeneity in the composition of an interpersonal population and diverse traits of board members, originating from the prehistoric course of the exodus of Homo sapiens from East Africa tens of thousands of years ago, is an important factor explaining the effectiveness of executive board monitoring with respect to a bank engaging in financial misconduct. The underlying intuition is that population-fragmented societies, characterized by mistrust, preference heterogeneity and corruption, find it difficult to sustain collective integrity action.Design/methodology/approachEmploying a panel of US banks from 1998 to 2019 we find that adding directors from countries with different levels of interpersonal population diversity is positively associated with financial misconduct as measured by enforcement and class action litigation against banks by the main regulatory agencies. Furthermore, we document that the more population-diverse bank boards are more likely to commit misconduct, consistent with a mechanism of inter-generational transmission of cultural norms of mistrust and non-cooperation.FindingsWe find that adding directors from countries with different levels of interpersonal population diversity is positively associated with financial misconduct as measured by enforcement and class action litigation against banks by the main regulatory agencies. These results are robust to controlling for bank-specific variables, including other board characteristics, and to the use of instrumental variables.Practical implicationsThe findings suggest that reducing financial misconduct by banks likely requires reducing the interpersonal population diversity of banks’ executive boards.Originality/valueWe show how bank boards with different interpersonal population diversity impact the likelihood of engaging in misconduct provides evidence of the microeconomic effects of interpersonal population diversity. We show the negative results of diversity that they can have on the management of a firm given that populated diverse boards are more likely to lead to higher levels of misconduct. Our evidence reveals that banks having interpersonal population fragmented boards are more likely to commit misconduct given the cultural norms of mistrust and the lack of societal cohesiveness.

A Study on Select Bank Specific Variables Impacting the Profitability Among Public Sector Banks any banks in India.

A Study on Select Bank Specific Variables Impacting the Profitability Among Public Sector Banks any banks in India.

Determinants of Bank Profitability—Do Institutions, Globalization, and Global Uncertainty Matter for Banks in Island Economies? The Case of Fiji

The objective of this study is to examine the influences of institutions, globalization, and world uncertainty on bank profitability in small developing economies. Consequently, we emphasize the significance of both bank-specific and other external factors influencing bank profitability. The empirical estimation is based on seven banks in Fiji—a small island economy—over the period 2000–2021. Together with bank-specific and macro factors, we account for institutions, globalization, and world uncertainty in analyzing the determinants of bank profitability. The study uses the fixed-effect estimation method. From the results, we observe that bank-specific variables, like the net interest margin, non-interest income, bank size, and capital adequacy ratio, are positively associated with bank profitability. Non-performing loans and credit risk are negatively associated with bank profitability. Macro variables, such as real GDP growth and remittances, have positive effects on bank profitability. Institutional factors, such as government effectiveness and voice and accountability, are positively associated with bank profitability. Regarding globalization, we find that it supports bank profitability. Global uncertainty and the Global Financial Crisis (2007–2008) are positively associated with profitability, whereas the global pandemic (COVID-19) is negatively associated. This study underscores the need to analyze the bank performance with factors beyond those reported in financial statements to derive a comprehensive understanding and appreciation of the complex nature of banking operations.

A Study on The Cost And Profit Efficiency of Islamic and Conventional Bank Islamic Windows in Oman: A Proposed Framework

Objective: This study aims to analyze the efficiency of Islamic and conventional banks and their respective Islamic windows in Oman in terms of costs and profits. Theoretical Framework: The research employs a framework that examines cost and profit efficiency within the banking sector, contrasting the performance of full-fledged Islamic banks and Islamic windows of conventional banks. This framework also investigates the impact of bank-specific variables on efficiency levels. Method: Using empirical data from the Omani banking sector, the study quantifies efficiency by analyzing bank-specific variables such as capitalization, profitability, operational costs, and loan activity. The comparison includes both Islamic banks and the Islamic windows of conventional banks as of the end of the third quarter of 2022. Results and Discussion: The findings reveal that, overall, banks in Oman are more efficient at generating profits than controlling costs. Conventional banks, on average, demonstrate higher efficiency in both cost and profit metrics compared to Islamic banks. There exists a positive correlation between both types of efficiencies and factors like bank capitalization and profitability, while a negative correlation is evident with operational costs. Furthermore, increased loan activity is associated with higher profit efficiency but adversely affects cost efficiency. Research Implications: These results underscore significant efficiency disparities between Islamic and conventional banking sectors. They highlight the need for Islamic banks to enhance their cost management strategies without compromising profit generation, leveraging the benefits derived from their association with parent conventional banks. Originality/Value: The study contributes to the literature by providing a comparative analysis of cost and profit efficiencies in Islamic and conventional banks, with a particular focus on the unique market dynamics of Oman. This research is valuable for stakeholders in the Islamic banking industry, offering insights into leveraging existing infrastructures and enhancing operational efficiencies.

Market power and bank risks: insights from India and Bangladesh

PurposeThis study aims to investigate whether various types of risks faced by the publicly listed commercial banks of India and Bangladesh are driven by market power and provides comparative insights from both economies.Design/methodology/approachBy using the adjusted Lerner index to gauge bank market power and applying the generalised methods of moments (GMM) regression approach, the research delved into the relationship between bank market power and three distinct facets of risk across a sample of 26 publicly listed commercial banks in India and 22 listed banks in Bangladesh spanning from 2011 to 2022.FindingsThe results indicate that for Bangladesh, both “competition fragility” and “competition stability” viewpoints coexist simultaneously across all risk types, supporting a nonlinear relationship between market power and risk. However, in the Indian context, a nonlinear association exists only in the case of credit risk, while the relationship with insolvency risk is linear, substantiating the “competition fragility view”. Apart from market power and bank-specific variables, GDP growth rate has emerged as a prominent driver across all risk categories in both countries.Research limitations/implicationsThe filtration of banks is a limitation that might have influenced the outcomes. This study recommends that the Reserve Bank of India encourages further bank consolidation. Along the same line, Bangladesh Bank should closely oversee the growing competitive landscape. Furthermore, the regulators must monitor the elevated levels of non-performing loans to reduce credit risk so as to bolster the stability of their respective banking sectors.Originality/valueThis comparative study is the first attempt to analyse the market power and risk relationship and includes a novel bank-specific variable, i.e. technology, apart from other established variables.

EFFECT OF NON-PERFORMING LOANS ON THE FINANCIAL PERFORMANCE OF NEPALESE COMMERCIAL BANKS

This research has been conducted to show the effects of non-performing loans on the financial performance of commercial banks in Nepal. Both the macroeconomic variables and bank-specific variables are used in the study. Descriptive and analytical research design has been used to analyze and interpret the results. Secondary data has been collected from the annual reports of banks for bank-specific variables and macro-economic variables are collected from the economic survey. Five-year data was collected from the twenty commercial banks from 2015/16 to 2019/20. Banks are selected using the convenient sampling technique. Data are interpreted and analyzed using inferential (Correlation and Multiple Regression) statistics. The study takes two dependent variables (ROA and ROE) and five independent variables (CAR, CRR, Size, GDP, and Inflation). The findings show that there are statistically positive and significant effects of size and inflation on ROA and similar effects of cash reserve ratio and inflation on ROE. The result also shows that CRR and CAR have a negative but statistically significant effect on ROA and ROE. Other independent variables GDP and CAR have nominal effects on the financial performance of commercial banks in Nepal. Key Words: Capital adequacy, Cash reserve, financial performance, ROA, ROE.

The Impact of Macroeconomic Factors on the Banking Sector’s Profitability in Pakistan

This research aims to study and analyze the impact of macroeconomic factor on the banking sector’s profitability in Pakistan. Banking sector of Pakistan is the backbone of its economy. The study explains the importance of banking industry of Pakistan and its achievements and evolvement throughout the years. The objective of the study is to examine the macroeconomic factors’ influence on the banking sector in Pakistan and to investigate that whether the profitability is only determined by the bank-specific internal factors or if it is also influenced by macroeconomic shocks and factors of the economy. The study is quantitative and secondary data is employed in order to conduct this paper. The sample size is financial data of scheduled banks in Pakistan from the year 2000 to2022, which is converted in quarter data and 84 observations have been incorporated in the study. “Returns on Assets” (ROA) is selected as dependent variable of this study since it measures profitability of banks. Whereas “Foreign Direct Investment” (FDI), “Exchange rate” (LER), “Inflation” (INF), “GDP growth” (GROWTH), “Liquidity” (LLIQ), “Total Deposits” (LT_DEP) and “Credit’s ratio” (CREDIT) of the banks are selected as independent variables. The data for bank specific variables is collected from the websites of “State Bank of Pakistan” (SBP) and “Federal Reserves of Economic Data” (FRED) while the data for macroeconomic variables is derived from the database of “World Bank” and “Macrotrends”. For empirical analysis, we have applied “Vector Autoregression” (VAR) model, followed by “Multivariate Granger Causality test”, “Impulse Response Function” (IRF) and “Forecast Error Variance Decomposition” (FEVD). The main findings of study reveals that the profitability of Banking sector in Pakistan is more influenced by its own internal factors rather than the external / macroeconomic factors. Amongst macroeconomic variables, “Foreign Direct Investment” (FDI) and “Inflation” (INF) are found to have the significant impact, while “Exchange rate” (LER) and “GDP growth rate” (GROWTH) are found to have insignificant impact on banks’ “Return on Assets” (ROA). All the internal factors of our study i.e. “Liquidity” (LLIQ), “Deposits” (LT_DEP) and “Credit ratio” (CREDIT) are found to have significant impact on profitability, which is measured through “Return on Assets” (ROA). In short, the profitability of banking sector in Pakistan is mainly influenced by bank-specific internal factors of the industry. The macroeconomic factors are only 50 percent % affective on the banks’ performance.

The impact of adopting Basel III liquidity coverage ratio, stable funding ratio, and leverage ratio on lending in the Malawian banking sector

This paper examines the impact of adopting Basel III Liquidity Coverage Ratio, Stable Funding Ratio, and Leverage Ratio on lending in the Malawian banking sector. Malawi’s banking industry regulators are planning to transition to Basel III from the current Basel II regime. This paper pioneers an assessment of the implications of this move for the banking industry. The study uses monthly data for the period January 2010 to December 2022, the Feasible Generalised Least Square (FGLS) Panel Regression model with bank-specific variables (X) and macroeconomic controls (Z). The study finds that Tier 1 has a positive and significant impact on Malawi’s banking sector lending growth, while Tier 2 has a negative and insignificant impact on banking sector-wide lending growth effects. The non-risk weighted asset Basel III leverage ratios have significant and negative impacts on Malawi’s bank sector lending growth. And that the liquidity coverage ratio (LCR) had a positive and significant effect in explaining variability in lending in Malawi banking overall, while the introduction of the stable funding ratio (SFR) had a positive and significant impact on banking sector-wide lending growth effects. The study also found that the Basel III Capital and Liquidity Rules have different effects on firm-level lending for the 8 banks in Malawi.

Uncertainty and bank risk in an emerging market: The moderating role of business models.

The paper explores the role of business models in the link between uncertainty and bank risk. From the perspective of banks, given that future outcomes tend to be less predictable if banking uncertainty rises, we highlight a framework that a larger dispersion of bank shocks to bank-specific variables might mirror such decreased predictability as a consequence of increasing uncertainty. To compensate for the persistence of bank risk and address the endogeneity issue, we applied the system generalized method of moments (GMM) estimator as the main regressions. Analyzing a panel of commercial banks from Vietnam between 2007 and 2019, we find that higher levels of banking uncertainty may increase bank risk, as gauged by banks' credit risk (loan loss reverses and non-performing loans) and default risk (Z-score index). This detrimental influence of uncertainty appears to be most pronounced with banks relying on pure lending, and it decreases with more non-interest income. A deeper investigation after estimating the marginal effects with plots reveals an asymmetric pattern that bank risk is immune to uncertainty in banks with the highest level of income diversification. Interestingly, we also provide evidence that uncertainty may lower the default risk level when income diversification exceeds a sufficiently high level. Our findings demonstrate that diversified business models are an efficient buffer against higher bank risk in times of increased uncertainty.

Unravelling the drivers of priority sector lending for inclusive economic growth: Evidence from India

This research aims to explore the factors influencing Priority Sector Lending (PSL) in India, with a specific focus on both bank-specific and macroeconomic variables. By delving into the determinants shaping the implementation of PSL, the study seeks to understand why PSL levels have fallen below mandated targets in recent years. The study examines PSL data from 18 institutions spanning the years 2007 to 2020. The study looks at connection between factors specific to banks, macroeconomic variables, and the distribution of credit to support priority sectors using a random effects model that takes into account the different types of variables. The analysis reveals a noteworthy positive correlation between deposits and PSL. However, the study finds insignificance in the relationship between bank-specific variables and PSL. These findings shed light on the complexities surrounding meeting PSL targets, underscoring the necessity for comprehensive policy interventions, capacity-building initiatives, and improved stakeholder coordination to bolster the effectiveness of PSL. Understanding the challenges and opportunities associated with achieving PSL targets is crucial. The research underscores the need for proactive policy measures, efforts to enhance institutional capacities, and better coordination among stakeholders. Implementing these measures could significantly augment the efficacy of PSL and foster inclusive growth by ensuring financial access to underserved segments of society in India.

EFFECTS OF FINANCIAL MARKET DEVELOPMENT ON BANK CAPITALIZATION RATIO: EVIDENCE FROM COMMERCIAL AND NON-COMMERCIAL BANKS IN TANZANIA

Financial market development in many developing countries is a series of financial market reforms aimed at improving the market and the financial system in general. Theoretically, major reforms that improve the stock market are expected to increase bank performance by reducing bank risk of default by increasing the bank capitalization ratio. This results in stability in the financial market and banking sector. Nonetheless, empirical literature in addition shows that the quality of the financial market may be at high risk following the reforms process because of the integration effects of the markets across the countries or regions. A good example of this is the global financial crisis of 2007/2008. Based on this background, the present study investigates the extent to which the financial market development in Tanzania influences the bank's capitalization ratio (commercial and non-commercial banks). Employing a two-step system GMM technique in a dynamic panel dataset regression model for the investigation for a period of 2012 to 2021, while macroeconomic and bank-specific variables have been used as control variables. We proxy financial market development as stock market development. This study finds that stock market development in Tanzania measured in terms of stock market turnover ratio improves bank capitalization ratio with the goals of enhancing the financial market and maintaining stability in the banking sector.