Factors Influencing the Profitability of Commercial Banks in Bangladesh

Abstract

This study synthesizes empirical research on the determinants of bank profitability, efficiency, and risk, drawing upon both cross-country and country-specific analyses. Key contributions from the literature reveal that profitability in banking is influenced by a combination of internal factors—such as capital adequacy, asset quality, management efficiency, and size—and external factors, including macroeconomic conditions, regulatory frameworks, and market competition. Studies such as Demirgüç-Kunt and Huizinga (1999) and Staikouras and Wood (2004) provide foundational insights into how global banks respond to interest margins and systemic conditions. Research focusing on specific regions, including Latin America, Southeast Europe, and Iberia, highlights the heterogeneity in banking behavior due to institutional and economic differences. Notably, recent studies account for non-linearity and crisis-period effects, as explored by Dietrich and Wanzenried (2011) and Nguyen (2018). The role of multicollinearity in regression-based bank performance models is also critically examined, referencing Paul Allison’s guidance on when it can be safely ignored. This review underscores the importance of contextual factors and methodological rigor when evaluating bank performance and provides a comprehensive basis for future empirical and policy-oriented research. Findings consistently indicate that stronger capital bases and efficient cost management boost banks’ profitability Conversely, higher credit risk (non-performing loans) erodes earnings. Robust macroeconomic growth (measured by GDP growth) generally lifts bank profits. Recent studies also highlight that greater adoption of digital FinTech innovations tends to enhance bank profitability Bank size is typically associated with economies of scale, but evidence shows non-linear effects: beyond a certain scale, further growth yields diminishing profitability gains. In conclusion, these insights suggest that bank managers and regulators should prioritize capital adequacy, cost and risk controls, and technology adoption to sustain profitability.