Banking Profitability

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International Review of Business Research Papers
Vol. 8. No.4. May 2012. Pp.157 – 176
Bank Profitability: The Case of Bangladesh

Mohammad Abu Sayeed*, Piyadasa Edirisuriya**
and Mohammad Hoque***
This study attempts to examine the impact of asset and liability management on the profitability of commercial banks in Bangladesh. Commercial banks are segmented into high profitable and low profitable and private and public banks. While applying Statistical Cost Accounting (SCA) methods study finds high earning banks experience higher returns from their assets and lower returns from their liabilities than the low earning banks. Results are inconclusive with regard to private banks’ and public banks’ returns. This study finds that assets management of large commercial banks is better than those of small banks, but they are not better than small banks in respect of liability management.

Keywords: Asset, Liability, banks, profitability
JEL classifications: E 42 E44

1. Introduction

Banks‟ profitability is of utmost concern in modern economy. Banks are in a business to receive deposits or liabilities and to issue debt securities on the one hand and create or invest in assets on the other hand (Fama, 1980). Commercial Banks i

incur costs for their
liabilities and earn income from their assets. Thus profitability of banks is directly affected by management of their assets and liabilities. In addition, different market and macroeconomic factors also influence the ability of the banks to make profits (Short, 1979; Molyneux and Thornton, 1992; Athanasoglou et al, 2008). The asset and liability base of banks in developing countries are narrower than their counterparts in developed countries. This study examines how asset and liability management together with external variables such as degree of market concentration and inflation rate impact the profitability of selected commercial banks in Bangladesh. The issue of the impact of assets and liability management on the profitability of the commercial banks in Bangladesh has not been studied until now. As such, the objective of this study is to complete this gap and to provide suggestions for improving banks‟ profitability through better asset and liability management in Bangladesh.

________________________________________________________________ *Mohammad Abu Sayeed, Department of Business Administration, Jahangirnagar University, Savar, Dhaka, Bangladesh
**Piyadasa Edirisuriya, Department of Accounting and Finance, Monash University, P.O. Box 197, Caulfield East, Victoria 3145, Australia, Email:, Phone: +61 3 9903 2226; Fax: +61 3 9903 2422

***Mohammad Hoque, Department of Accounting and Finance, Monash University, P.O. Box 197, Caulfield East, Victoria 3145, Australia, Email: Sayeed, Edirisuriya & Hoque

Asset and liability management (ALM) does not entail only managing individual asset and liability. It is an integrated approach, which requires simultaneous decisions about the types and amounts of financial assets and liabilities the institutions hold, in other words, the asset/liability mix and volume (Gardner and Mills, 1994). Gup and Brooks (1993) argue that ALM in banks requires simultaneous planning of all asset and liability positions on the bank‟s balance sheet. As such, the objective of ALM is to maximise banks‟ profits (Tektas et al, 2005). Therefore the core issue of ALM is to find out the optimal combination and composition of banks‟ assets and liabilities that maximizes the bank‟s profit, (Asiri (2007). In this study, a modified Statistical Cost Accounting (SCA) model is applied to test whether there are differences in return on assets and cost from liabilities between high earning banks and low earning banks. It also examines whether the financial performances of the private sector banks are better than public sector banks.

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