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Banks play a significant role in a country's’ economic development and by converting deposits into productive investments, the banking sector provides financial intervention and economic stimulation. If a bank performs well, then it should record its profitability growth because it will indicate where the bank is now standing. Rajan & Zingales (1995) stated that the growth of the economy will depend on the soundness of the banking sector. During the last couple of decades, the banking sector has experienced global serious changes in its operating context and the structure and performance of the banks have affected by both internal and external factors. According to Alunbas et al. (2001), as financial deregulation, technological, and financial innovation are becoming more challenging for market participants, financial institutions and banks should give more priority to their bank efficiency.
The word “profitability” indicates the capacity of a business institution to sustain its earnings season after season. The financial institutions’ profitability represents the progress of the institution which is one of the investors’ most powerful evaluation criteria. Profitability shifts are leading to economic growth as profits affect businesses’ spending and savings strategies. Additionally, the increase in earnings increases the cash flow status of firms and generates significant stability in the path of investment portfolio funding. Easier external financing allows to focus more on increasing efficiency and productivity, also creates working opportunities (Menicucci & Paolucci, 2016). Nevertheless, for maintaining the soundness of financial institutions in both present and future, factors affecting the profitability should be explored.
Many studies, for example, Short (1979), Bourke (1989), Molyneux & Thorton (1992), and Goddard et al. (2004) have examined the sources of variables in bank-level profitability in finance and accounting, economics, and strategic management sector. However, these findings enable to conduct of a worthy analysis of bank profitability but in some areas, the issues are not dealt with sufficiently. Firstly, in many studies, the concept of econometric technology does not effectively explain which is not appropriate for some characteristics of bank profits. Meaning that the results obtained may be inconsistent and biased. In addition, the literature does not describe the effect of macroeconomic variables, used a small-time dimension of the panels. From most of the studies, it is found that bank performance is influenced by domestic factors.
This study tries to examine possible internal determinants of bank profitability of the Bangladeshi banking sector such as size, operating efficiency, liquidity, credit, market share. However, the impact of macroeconomic variables (GDP and inflation) on bank profitability is also considered. The findings of the study are likely to be essential to the policymakers, investors as well as the banking itself.
The paper is organized in the following manner. The next section presents the banking sector of Bangladesh. Section 3 reviews the relevant literature on the determinants of bank profitability followed by a description of the data and research methodology. Section 5 reports the findings of the study and the conclusion of the study is presented in section 6.