The determinants of conventional banks profitability in developing and underdeveloped OIC countries

Abstract

Purpose The purpose of this study is to investigate the effect of internal and external variables on the profitability of conventional banks operating on developing and underdeveloped countries, the Organization of Islamic Cooperation (OIC) states. Design/methodology/approach In this paper, the author uses ordinary least squares fixed-effects model on an unbalanced panel data set of all conventional banks operating in OIC countries (52 countries included from 57) over the period 1989-2008, 686 banks. Findings The results suggest that equity, foreign ownership, off-balance sheet (OBS) activities, real gross domestic product growth, real interest rate and concentration foster banks’ profitability. In addition, the results showed that the banking sector development and loans will increase banks’ profitability in the long run in the countries of the studies. In contrast, the study reported that deposits lower profitability. The study also revealed that GDP per capita, market capitalization and banks size have no impact on profitability. Practical implications The findings of this study have considerable policy implications. First, policymakers need to regulate nontraditional activities to avoid any financial crisis because banks in OIC countries are heavily engaged in nontraditional activities to boost its profit. Second, policymakers are advised to improve the deposit insurance system to insure the stability of the financial system as well as improving banks’ profitability. Third, policymakers need to improve the efficiency of the stock market, maintain small banking system and encourage foreign investments in the banking system. Originality/value The paper adds to the literature on the commercial bank’s profitability determinants. In particular, such study has not been conducted on OIC countries, and the study included all mainstream banks and incorporated the effect of deposit insurance system so far. Also, pure sample of conventional banks used as many conventional banks in OIC countries have Islamic windows or offer Islamic products. In addition, this study investigated the effect of OBS activities on net interest margin (NIM) because the studies that explored this interrelationship are limited especially for developing and under developed countries. The results showed that OBS activities contributed significantly and positively to return on assets and NIM. Moreover, this paper used a pure sample of conventional banks to avoid any biasness; see data section. Moreover, this study gives an idea about the economic situation and financial conditions of OIC countries during the period of the study.

Determinants of Portuguese banks' profitability: an update

“…Some authors, for example, Kosmidou et al (2005), Zhang andDong (2011), Tembe (2011) and Hammami et al (2018) reported a positive effect, while others, namely Garcia and Guerreiro (2016), reported a negative effect but with low statistical significance. Similarly to our results, Al-Harbi (2019) found this variable insignificant.…”

Profitability determinants of Nepalese commercial banks

“…Further, banks engage in off-balance sheet activities hoping to earn additional income to compensate for the decline of its earnings from traditional activities. Conversely, banks that are heavily involved in nontraditional activities are subject to higher risks which may lead to lower profitability (Al-Harbi, (2019). Studies like Valverde & Fernández, (2007), Nguyen, (2011), Sufian, (2011), Petria et al, (2015 etc.…”

“…found negative relationship between them. By following the study of Al-Harbi, (2019), this study has used other operating income to total assets as a proxy of Off-balance sheet activities. In addition, Al-Homaidi et al, (2018) argued that the number of branches is the most significant bank-specific determinants that influence the banks' profitability.…”

The effect of interest rates, exchange rates and capital structure on banking profitability of BUMN and Private Go Public in Indonesia

“…The results of this study indicate that the 4 hypotheses are supported. The first hypothesis in this study is that interest rates have a positive and significant effect on bank profitability as found by (Al Harbi, 2019) that real interest rates drive bank profitability. In addition, the results of the study indicate that the development of the banking sector and the distribution of bank credit will increase profitability in the long term; (Adetunji & Oladele, 2017) the findings show that there is a significant positive relationship between credit interest rates and bank profitability.…”

“…The increase in credit interest rates will affect banking operational activities in financing and channeling funds, so that it will increase bank income or profit. Research (Al Harbi, 2019) states that real interest rates encourage bank profitability, the results of the study show that the development of the banking sector and bank credit distribution will increase profitability in the long term. The results of this study support previous research, namely (Satria & Sudjarni, 2016) which states in their research that interest rates have a significant positive effect on stock returns of food and beverages companies on the Indonesia Stock Exchange.…”