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Archives of Business Research – Vol. 10, No. 12
Publication Date: December 25, 2022
DOI:10.14738/abr.1012.13570. Saha, T. (2022). Determinants of the Profitability of Non-Banking Financial Institutions: An Empirical Study on Bangladesh
Perspective. Archives of Business Research, 10(12). 121-131.
Services for Science and Education – United Kingdom
Determinants of the Profitability of Non-Banking Financial
Institutions: An Empirical Study on Bangladesh Perspective
Tama Saha
Assistant Professor
Department of Finance & Banking
Comilla University, Cumilla, Bangladesh
ABSTRACT
The main purposes of this research are to identify the critical microeconomic
factors affecting non-banking financial institution profitability in Bangladesh. This
study examined the financial statements of 20 NBFIs in Bangladesh for 10 years
(2011–2020). The influence of intrinsic features of individuals in the panel data set
was estimated using random effect regression models. The study's results have
shown that asset structure and operating efficiency positively affect the
profitability of NBFIs in Bangladesh. In contrast, capitalization level, leverage, asset
quality, firm size, and liquid assets negatively impacted ROA. The empirical findings
of this study will aid policymakers in developing a more realistic strategy for
increasing the profitability of NBFIs in Bangladesh by concentrating on key
elements.
Keyword: Micro-economic Factors, ROA, ROE, NBFIs, Capitalization Level, Leverage,
Asset Quality, Firm Size, Liquid Assets.
BACKGROUND OF THE STUDY
Financial Institutions play crucial role in the economic growth of any nation by relocating the
fund from surplus units to deficit units. Through the financial intuition, household savings
transformed into industrial capital, which ensuring the nation's economic progress. In
Bangladesh, two major types of financial institutions are operating- Banking Financial
Institutions and Non-banking Financial Institutions. Non-banking Financial Institutions, as
defined by the Bangladesh Bank, are financial mediators that gather money from the public and
lend them to gratify particular financing necessities. They are not authorized to take checks,
drafts, or other forms of payment, or to manage current accounts. According to Financial
Institution Regulation-1994, NBFI must have minimum paid-up capital of 1.0 billion in
Bangladesh. Since then, the number as well as scope of NBFIs has increased dramatically due
to the entry of several state-owned, private, and joint venture enterprises. Currently,
Bangladesh has 35 NBFIs, three of which are government-operated, 19 privately owned, and
13 joint ventures. As of 30 June 2021, there are 276 NBFI branches in Bangladesh. (Department
of Financial Institutions and Markets, Bangladesh Bank).
NBFIs participate in a diverse array of profit-generating activities in addition to deposit and
lending. That is why the management of NBFIs must engage in a variety of risky financial
operations. Since their inception, NBFIs have contributed immensely to the country's economic
growth. Many investors have been increasingly interested in the NBFIs' processes and
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Archives of Business Research (ABR) Vol. 10, Issue 12, December-2022
Services for Science and Education – United Kingdom
profitability because of their importance towards the economic development of the country.
Consequently, stakeholders' principal emphasis has been evaluating their financial
performance in recent years.
Moreover, profitability assessment is critical for financial institutions because it is a strong
predictor of economic failure (Demirguc-Kunt & Detragiache, 1999). Financial institutions that
are well-functioning play an essential role in economic growth and financial success (Rabaa &
Younes, 2016). Thus, NBFIs must evaluate important profitability characteristics to prosper in
the long run in the competitive financial markets. If management can identify the critical factors
of profitability, they may take appropriate action to increase profitability. Moreover, NBFI's
profitability is a significant concern for many stakeholders, including the institutions' owners,
creditors, depositors, borrowers, the concerned management, investors, government
regulators, and others.
Regulatory authorities and government bodies are keenly interested in the performance of
banks and non-banking financial intermediaries for regulatory purposes. As a result, many
early researches in this field throughout the world focused on determining the factors that
affects the profitability of financial institutions. The positive relationship between economic
growth (GDP) and financial institutions' performance discovered by (Bikker & Hu, 2002) and
(Demirguc-Kunt & Hui-zinga, 1999) demonstrates that the bank and non-banking sector's
profitability promotes the economy's development by buffering adverse shocks. So, it is
required to analyze the factors that affect the profitability of NBFIs in Bangladesh in light of
recent developments and greater competition in the financial sector.
The remaining of this paper consists of the following sections: two is a literature review and
justifications for the study, and section three presents the study's objectives. In section four, the
study hypothesis has been presented that section five presents the research methodology;
section six discusses the results. The findings, recommendations and conclusion follow sections
seven and eight.
REVIEW OF PREVIOUS RESEARCH AND JUSTIFICATIONS OF THE STUDY
One of the most relevant study areas for bank academics is determining the factors that affect
the profitability of financial institutions. Numerous studies have been undertaken globally to
discover the elements that affect the profitability of financial institutions, especially banks.
They observed that a variety of factors determine a bank's profitability. Return on Assets (ROA)
and Return on Equity (ROE) are the most often used profitability measures.
(Khan et al., 2021) evaluated the profitability drivers of Islamic banks in Pakistan. They
identified a high and positive correlation between capital, management efficiency, bank size,
and deposit to the bank’s profitability.
(Khandoker et al., 2013) investigated the variables influencing the profitability of nonbank
financial institutions in Bangladesh. The study indicates that operational efficiency, as
measured by operating income, is the most crucial element in predicting a company's
profitability. In addition, capital structure, size, and operational expenditures influence the
profitability of NBFIs. Another variable, like deposit, also affects the profitability of NBFIs.
However, this variable is not statistically significant.
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Saha, T. (2022). Determinants of the Profitability of Non-Banking Financial Institutions: An Empirical Study on Bangladesh Perspective. Archives of
Business Research, 10(12). 121-131.
URL: http://dx.doi.org/10.14738/abr.1012.13570
(Chowdhury and Salman, 2021) performed study to identify the elements that affect the
profitability of Bangladesh's private commercial banks. They discovered that the capital
adequacy ratio, asset management ratio, and the pace of GDP growth significantly influenced
the return on assets and return on equity of private commercial bank in Bangladesh. The asset
quality, liquidity, and deposit ratios all have an advantageous impact on ROE, whereas their
influence on ROA is minimal.
(Rifat, 2017) uses macroeconomic and firm-specific factors to examine the drivers of non- performing loans (NPLs) in the Non-Bank Financial Institution (NBFI) sector in Bangladesh by
using a panel data set of seven NBFI with 12 years is investigated. GDP growth rate, inflation
rate, and broad money in GDP are employed as macro-economic factors. To quantify managerial
competency, the study incorporated firm-specific variables like loan growth, return on assets,
loan-to-asset ratio, and company size. The findings indicate that firm-specific characteristics
were more critical for NBFI non-performing loans.
(Imtiaz et al., 2019) investigated the essential financial elements impacting the profitability of
Bangladesh's NBFI business and evaluated the results. According to the study's findings, capital
adequacy ratio, the nonperforming loan ratio, deposit ratio, and net interest margin were all
statistically significant. Strong profitability indicators include a company's size, loan ratio, net
interest margin, and non-interest income margin. Nonetheless, the capital adequacy ratio, the
deposit ratio, the nonperforming loan ratio, and the cost-to-income ratio are all negative
profitability indicators.
(Jeris, 2021) examined the bank-specific as well as macroeconomic drivers of Bangladesh's
commercial banks' profitability to determine the importance of external and internal variables
in obtaining high profitability. The results demonstrate that size and capital ratios are major
bank-specific factors of banks’ profitability in Bangladesh, but the loan ratio has a statistically
insignificant effect. Additionally, the studies illustrate that banks with greater deposits are
more profitable, whereas small banks are managed efficiently.
In Bangladesh, (Ullah et al., 2020) also identified a significant correlation between ROA and NPL
and liquidity ratios in case of the state-owned commercial banks. It also demonstrates a
meaningful positive correlation between ROA and bank size.
Another researcher (Farah and Rahman, 2012) investigated the factors that affect NBFI
profitability in Bangladesh. They discovered that net profit is affected by capital structure,
operating efficiency, fixed expenses, revenue, and liquidity conditions. However, it was shown
that the liquidity condition and NBFIs’ operational efficiency in Bangladesh significantly
influenced their profitability.
From the extensive literature review, it has been seen that, numerous researches have been
conducted to determine the significant indicators of the banks’ profitability. Nevertheless, there
are few researches on the fundamental factors that affect NBFIs’ profitability, despite the recent
developments and increasing competition in these sectors. However, very little research has
been done in Bangladesh on the factors that affect NBFIs’ profitability. The researchers strive
to address this vacuum with this study, which intends to discover elements that may affect non- banking financial institutions' profitability in Bangladesh.