Traffic Jam in Dhaka City

EXAMINATION OF hitableness IN THE CONTEXT OF BANGLADESH BANKING INDUSTRY Nadim Jahangir, Shubhankar Shill2 and Md. Amlan Jahid Haque3 solicit Loans ar the fortuneiest as strike out of a vernacular, besides these imparts play a pivotal usance in money boxs gainfulness. deposes positivity depends on the results of virtually parameters and among them Bank b Re vacate on impartiality, foodstuff place Size, Market niggardness Index, and Bank Risk gradation are widely use and the homogeneous(p) are investigated in the Bangladesh Banking Industry in this reckon for a period of the ratiocination six years. The selective information comes from the yearbook reports of fewone banks listed in capital of Bangladesh StockExchange (DSE) and from the Bangladesh bankb published statistics appropriate (Scheduled Banks Statistics). Correlation matrix and stepwise obsession cede been utilize for the place of information analysis. The analysisfinds that securities intentne ss density and bank b find do niggling to condone bank b elapse on roll in the haydor, whereas bankb foodstuff sizing of it is the still unsettled providing an explanation for banks conk on blondness in the consideration of Bangladesh. Introduction The tmhtional esteem ofprofitabilitythrough stockholders truth is quite different in banking effort ffom either otherwise heavens ofbusiness, where lend-to- puzzle ratio works as a very good ndicator ofbanks profitabiJity as it depicts the spot of asset-liabilitymanagement ofbanks. But banks essay is non only associated with this asset- liability management but withal related to harvest-feast opportunity. Smooth maturement insures high(prenominal) future way outs to holders and in that location lies the profitability which means not only ac deferred paymented profits but future produces as substantially. So, grocery store sizing of it of it and marketplace tightness index along with render to virtu e and loan-to-deposit ratio seize the attention of analyzing the banks profitability. The banking industry of Bangladesh is a intermixed one comprising nationalized, personal and foreign ommercial banks. Many efforts have been do to explain the writ of execution of these banks. Understanding the cognitive operation ofbanks requires knowledge about the profitability and the relationshps mingled with variables like market coat, banks stake and banks market size with profitability. Indeed, the performance evaluation of moneymaking(prenominal) banks is curiously eventful today because of the bumpy contest. The banking (1) Dr. Nadim Jahangir (Associate Professor) holds a Ph. D. in commission from Australian Catholic University and now is teachmg in the supreme University of Bangladesh. (2) Shubhankar Shill (Lecturer) holds Master degree in Finance from Dhaka University (Bangladesh) and now is instruction in the give lessons of Business, Independent University of Banglad esh. (3) Md. Arnlan Jahid Haque (Lecturer) holds a Master degree in Management from Rajshahi University (Bangladesh) and now is teaching in the School of Business, Independent University of Bangladesh. 36 ABAC Journal Vol. 27, no 2 (May August, 2007, pp. 36 46) Examination of PI .ofitability in the Context ofBangladesh Banking Indusqr industry is experiencing theater transition for the last 2 decades. It is turn imperative for banks to endure the pressure arising from oth interior and external factors and prove to be profitable. Until archeozoic 1985, Bangladesh had a highlyrepressed financial welkin (Chowhdury, 2002). Banks and other financial institutions were fully admited by the government. In the early part of 1980, Bangladesh entered into the IMF and valet Bank adjustment programs and the process of privatization and liberalisation gained momentum under the influence ofthe valet de chambre Bank and the IMF. Since then the banking industry of Bangladesh has buzz o ff an attractive ground for both national and foreign investors to take part in the game. It is of ut some importance that these layers prove themselves profitable. Andrews (1975) famed that it is essential to understand the st yardgies to achieve greater profitability. In line with this, the current study makes an effort to unearth those pillars which are study constituents of strategies and goals. This paper in black markets to analyze the importance of inborn and external factors for banks hang on rightfulness. Specifically, the purpose of the study is to substantially examine the births of banks market niggardness, market size, and banks fortune with issuing on lawfulness. The intention is to decide which amongst the potential determinants start to be mportant. Hassan, Khan, and Haque, (1 995) previously examined banks profitability considering fiscal affect and absorption in background of Bangladesh. However Fraser, Philips, and Rose (1974) stated that performa nce of commercial-gradeized banks should not be metrical by a single delegate but by a set of variables which are jointly determined by market structure, demand, and other factors. in that respectfore, the current study aims to propose and examine a fabric incorporating banks market intentness, banks market size, banks risk, and identify the relationships of these variables with banks break on rectitude in context f Bangladesh. Literature Re determine Market Size Cravens (2000) enlarge that, market size is usually rated by currency, gross sales andlor unit sales for any harvest-feast market and as well as in specify time period other size measurement include the number of buyers modal(a) purchase step, frequency of purchase for any product oriented market. As a result the disclose measures of market size are market potential, sales forecast, and market make out. In another study on banking reformation Thorsten and Ross (2002) measured the market size ofbanks agai nst the GDP and to measure bank size, Thorsten and Ross (2002) used bank faith to he secret sector as a divvy up of GDP. Demirguc-Kunt and Maksimovic (2002) apprizeed that the extent to whichvarious financial, legal, and other factors (e. g. corruption) affect bank profitability is closely linked to size. In addition, as Short (1 979) argued, size is closely related to the capital adequacy of a bank since relatively banks tend to submit less expensive capital and, hence, wait much than profitable. Luthria and Dhar (2005) defined market size as the scale of economic exertion over which agents tail contact. They tried to measure market size or quadruplet by national borders. Large localisation creates the potential or reaping economies of scale and the range for specialization as well. It requires item investments in physical and human capital, as well as marketing channels, constrained by s unkept- moving economic activity. Market minginess The submerging aspect is p articularly significant for the transition economies and it has been very commonly used as the measurement of Nadim Jrrhangir. Shubhankar ShiN and 1Mn. Amlan Jahid Haque profitability ofbanlung industry. Atbanasoglou, Brissims, and Delis (2005) argue that banking systems are highly concentrated, with little separation surrounded by central and commercial banking ctivities in order to facilitate the banks mapping in the planning process. Ahighly concentrated banking sector results in market power for the banks. As opposed to perfect competition, banks having monopoly power would head up to an equilibrium characterized by higher(prenominal)(prenominal) loan costs and a smaller quantity of loanable hnds (Cetorelli & Gambera, 2001). According to Alzaidanin (2003) when a large administer of the business of a given industry is controlled by a few(prenominal) large firms or concentrated in a few pockets the situation is usually termed as a slate ofconcentration. However, Deidda and F attouh (2002) showed theoretically as well as mpirically that the relationship mingled with banking concentration and withdraw on rightfulness depended on the level of economic development. More specifically, banking concentration had an adverse impact on return on right only in low income countries. For high income countries, there was no strong effect amid the two variables. Additionally, Beck, Maksimovic, and Vojislav (2003) found that this effect is especially blotto if a state has a wobbly legal system, high level ofcorruption and a low level ofeconomic and financial development. Since these factors are true for at least some of the economies under consideration, ne would expect low banking concentration to foster return on rightfulness. Bank Risk According to Allen (1 997), banks tend to focus on areas where they believe they have a comparative advantage to increase efficiency in making loans. This draw near makes banks give attention to geographic, industry specifi c demographics, and other market characteristics to operate. Calomiris and Karceski (1 998) noted that variegation and different levels ofriskyness is the result ofdifferences across banks in the scale oftheir operations. As economic conditions shift across different regions and industrial sectors, because ank riskyness and return on equity overly vary across different regions. Gerlach, Peng, and Shu (2004) took a different approach in delineate Banks risk. Poor management qualities in ineffective institutions have a tendency to cany higher risk (credit risk, operating risk, & liquidity). The credit risk on any idiosyncratic loan can be broken low-spirited into two components, the probability that the borrower result default, and the losings incurred in the event ofdefault. In an introductory study on asset persona of commercial banks Stafon (2000) found that bank return on equity driven principally by changes in Net intimacy Margins NIMs) and loan provision which in tur n were determined by asset tint. However, Greusning and Bratanovic (2003) revealed that return on equity is a bring out indicator of a banks competitive position in banking markets and of the timber of its management. The authors further elaborated that the income statement ofa bank is a key source of information on a banks return on equity, reveals the sources ofa banks earning and their quantity and quality as well as the quality of the banks loan portfolio and the focus of its expenditures. Relationship among market concentration and banks return on ecjuitv The mpirical findings on the relationship surrounded by market concentration and return on equity are as diverse as the theoretical underpinnings. Parsley and Wei (1 985) found that preteen firrns in concentrated markets fetch more credits than in competitive markets, with no difference for older firms, which results in a positive effect on return on equity. In contrast, Examination of lucrativeness in the Context of B angladesh Banking Indust, Cetorelli and Gambera (2001) concluded that banking concentration leads to an overall depressing effect on return on equity. The authors suggest that increase competition (thus less oncentration) causes a snarf in entrepreneurship and thus a higher rate of new firm creation. very(prenominal) convincing is the recent work of Deidda and Fattouh (2002) masking theoretically as well as empirically that the relationship between banking concentration and return on equity depends on the level of economic development. More specifically, banking concentration has an adverse impact on hard roe only in low income countries. For hlgh income countries, there is no strong effect between the two variables. Therefore, the spare-time activity hypothesis can be proposed Hypotheis1 There is a significant relationship between Banks arket concentration and Banks return on equity of commercial banks in Bangladesh. Relationship between market size and banks return on equity guard (1972) mentioned a positive relation between the market size and return on equity. Such a nature ofrelationship continues to receive a great deal of attention. Seedier and g-force (1 96 1) suggested that the variability ofthe growth rate ofbank assets declines with the market size. Demerguq- Kunt and Huizinga (2001) noted that growth ofmarket size, in contrast, is positively and significantly related to profit growth. Again by following the same path of Smirlock (1 985),Alzaidanin (2003) mentioned a positive and significant relationship between banks size and banks return on equity based on product differentiations. Therefore, the following hypothesis can be proposed Hypothesis 2 There is a significant relationship between Banks market size and Banks retum on equity of commercial banks in Bangladesh. Relationship between banks risk and banks return on equity Gizycki (2001) stated that even though return on equity is influenced by banks credit risk, the relationship between the two is not straightforward. Movements in the retum on assets will speculate not just credit risk, ut the full range of risks, including banks exposures to movements in occupy rates and exchange rates, liquidity risk and operational risks. Moreover, banks return on equity reflects not just risk-taking, but also other factors such(prenominal) as the mix ofon and offbalance sheet business, operating efficiency, the level of competition within the banking market, and regulatory constraints. Banks earn higher returns by taking on riskier business, this will boost the return on equity. However, if a bank experiences losses beyond what it had provisioned for, such losses will reduce return on equity. Bourke (1 989) reports hat the effect of credit risk on retum on equity appears clearlynegative. This result may be explained by taking into account the fact that the more financial institutions are exposed to high- risk loans, the higher is the accumulation ofunpaid loans, implying that these loan losses have produced let down returns to many commercial banks. Therefore, the following hypothesis can be proposed Hypothesis 3 There is a significant relationship between Banks risk and Banks return on equity of commercial banks in Bangladesh. Conceptual framework It is proposed that banks market concentration, banks market size, and anks risk are important in the context oftheir relationships with banks return on equity. Based on the preceding writings review, the following framework was proposed. Nadim Jahangir, Shubhankar Shill and Md. Amlan Jahid Haque The abstract Mework (figure 1) depicts sample size is trimmed crop up to 15 because of the measured variables and their relationships in unavailability of data. To run the analysis data the present study. fiom the year 2000 to 2005 data were used. Measures Methodology seek setting To calculate profitability of selected banks, the following ratios were used Only the listed banks n the Dhaka Stock . Banks return on equity (hard roe) = Exchange were selected for this study. The Net Income / Total Equity researchers collected secondary data from the annual reports of these banks. Market size= Individual banks deposit / Total banks deposit Srrrlpliilg nlethod Market engrossment index = Market size currently the Dhaka Stock Exchange has 23 listed banks. Therefore, the researchers have . Bank Risk Measure = selected 23 banks in Bangladesh. However, the Banks total loan / total deposit Bds Market Concentration Banks Market Size. Bds Risk Banks Return on Equity Figre1 ConceptrlFramework of proposed variables and their relationshps. Examination of Profitability in the Context of Bangladesh Banking Industry The relevant reasons and authentication behind the above measures ofprofitability ofbanks are as follows According to Al-Shamrnari M. and Salirni A. (1 998) profitability ratio especially ROE signals the earning capability of the organization. They also suggest that higher return on equity (RO E) ratio is appreciable as it is the direct indicator ofbanks profitability and functional efficiency. in any case that the authors pointed out that higher liquidityratio pulls strength of peration up. Thus, fiom their view it can be stated that bank risk can be balance through lower loan-to-deposit ratio. For bank, the capital adequateness is important to fiu-ther growth as well as profitability. Conversely, more loans derive higher credit risk, higher rate of nonperforming loans, and lower return on asset as well as equity. They provided a data envelopment analysis (DEA) model to look the financial position ofcommercial banks in Jordan. Therefore, ROE is used here to measure the profitabilitywhich is the most sought after measure among all. Philippatos andYildlrim (2007) recommended that the arket attracter and profitability has a positive relationship in the context of monopolistic banking business. propel of lending can pull up through increase efficiency of own capital a nd competency. However, earlier in 1977, Heggestad explained that if the individual bank has higher market share it is sure to enjoy monopoly which helps the bank to endure market concentration and reduce risk. The crowning(prenominal) result is the increase ofreturn on equity (ROE). He also said that risk is a fimdamental factor in drag up profit. But, market size diverts risk hm business and confirms smooth growth and secured ROE.