The impact of bank performance and economic growth on bank profitability: CAMEL model application in middle-income countries
-
Author(s)Zakia AbdelmoneimLink to ORCID Index: https://orcid.org/0000-0002-0679-2390
,
Mai YasserLink to ORCID Index: https://orcid.org/0000-0002-2067-8113
-
DOIhttp://dx.doi.org/10.21511/bbs.18(3).2023.17
-
Article InfoVolume 18 2023, Issue #3, pp. 205-220
- Cited by
- 339 Views
-
145 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
This paper aims to study the impact of both bank performance and economic growth on bank profitability in 8 middle-income countries from the Middle East and North Africa (MENA) region and MINT countries using the Generalized Method of Moments (GMM) model. Bank profitability is measured by return on assets (ROA) and return on equity (ROE), net interest margin (NIM) is measured by CAMEL model, and economic growth is measured by gross domestic product (GDP) growth. The sample period ranges from 2000 to 2020, and data are extracted from the World Bank financial indicators and database. This paper is supported by the financial intermediation theory. By comparing both MINT and MENA regions, the results show that in the MINT region, ROA is affected most by both asset management and capital adequacy ratio (CAR), while NIM is affected by asset management, liquidity, and management. Regarding the MENA region, ROA and NIM are affected by CAR only. No relationship was found between ROE and any of the CAMEL determinants in both regions. The results show superior performance for MINT than MENA; strong and active capital, increment in assets, credits, and deposits, and enhancement in bank profitability that is reflected in economic growth progress. Both MENA and MINT regions’ profitability (ROA and ROE) is affected by GDP, so their economies are restructuring very well and their banking industries are expected to grow rapidly.
- Keywords
-
JEL Classification (Paper profile tab)O11, M41, G21
-
References56
-
Tables8
-
Figures1
-
- Figure 1. Proposed model
-
- Table 1. Variables and measures
- Table 2. Descriptive data
- Table 3. KAO Co-integration results
- Table 4. Regional GMM results
- Table 5. Summary of the hypotheses and results from the model
- Table A1. Unit root test results
- Table B1. GMM panel estimation
- Table C1. List of abbreviations
-
- Abduh, M., & Omar, M. A. (2012). Islamic Banking and Economic Growth: The Indonesian Experience. International Journal of Islamic and Middle Eastern Finance and Management, 5(1), 35-47.
- Al-Jafari, M. K., & Alchami, M. (2014). Determinants of Bank Profitability: Evidence from Syria. Journal of Applied Finance and Banking, 4(1), 17.
- Al-Nuaimi, Saad Allah M.O. (2017). Evaluating the Performance of Banks Using the PATROL Model, An Analytical Study of a Sample of Iraqi Private Banks. Tikrit Journal of Administrative and Economic Sciences, 13(39), 319-351.
- Altan, M., Yusufazari, H., and Bedük, A. (2014). Performance Analysis of Banks in Turkey Using Camel Approach Introduction. Proceedings 14th International Academic Conference. Malta.
- Anarfi, D., Abakah, E. J. A., & Boateng, E. (2016). Determinants of Bank Profitability in Ghana: New Evidence. Asian Journal of Finance & Accounting, 8(2), 194-204.
- Arellano, M., & Bover, O. (1995). Another Look at The Instrumental Variable Estimation of Error-Components Models. Journal of Econometrics, 68(1), 29-51.
- Banto, J., & Monsia, A. (2021). Microfinance Institutions, Banking, Growth and Transmission Channel: A GMM Panel Data Analysis from Developing Countries. Quarterly Review of Economics and Finance, 79, 126-150.
- Bikker, J. A., & Hu, H. (2002). Cyclical Patterns in Profits, Provisioning and Lending of Banks and Procyclicality of the New Basel Capital Requirements. PSL Quarterly Review, 55(221), 143-175.
- Bolbol, A., Fatheldin, A., & Omran, M. (2005). Financial Development, Structure, And Economic Growth: The Case of Egypt, 1974–2002. Research in International Business and Finance, 19(1), 171-194.
- Boukhatem, J., & Moussa, F. B. (2018). The effect of Islamic banks on GDP growth: Some evidence from selected MENA countries. Borsa Istanbul Review, 18(3), 231-247.
- Bourke, P. (1989). Concentration and Other Determinants of Bank Profitability in Europe, North America, and Australia. Journal of Banking & Finance, 13(1), 65-79,
- Ceylan, F., & Ceylan, I. (2020). Does Bank Profitability Promote Economic Growth and Vice Versa? Panel Causality Evidence from The Selected Countries. Proceedings of The Third Economics, Business and Organization Research (Ebor) Conference (pp. 105-115). Rome, Italy.
- Chowdhury, M. A. F., & Rasid, M. E. S. M. (2016), Determinants of Performance of Islamic Banks in GCC Countries: Dynamic GMM Approach. In D. S. Mutum, M. M. Butt, and M. Rashid (Ed.), Advances in Islamic Finance, Marketing, And Management (pp. 49-80). Bingley: Emerald Group Publishing Limited.
- Christopoulos, A. G., Mylonakis, J., & Diktapanidis, P. (2011). Could Lehman Brothers’ Collapse Be Anticipated? An Examination Using CAMELS Rating System. International Business Research, 4(2), 11-19.
- Claessens, S., & Horen, N. V. (2015). The Impact of the Global Financial Crisis on Banking Globalization. IMF Economic Review, 63(4), 868-918.
- Demirguç-Kunt, A., & Huizinga, H. (1999). Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence. World Bank Economic Review, 13(2), 379-408.
- Dietrich, A., & Wanzenried, G. (2013). The Determinants of Commercial Banking Profitability in Low-, Middle-, and High-Income Countries. The Quarterly Review of Economics and Finance, 54(33), 337-354.
- Easterly, W., & Levine, R. (2001). What Have We Learned from A Decade of Empirical Research on Growth? It’s Not Factor Accumulation: Stylized Facts and Growth Models. The World Bank Economic Review, 15(2), 177-219.
- Fatima, N. (2014). Capital Adequacy: A Financial Soundness Indicator for Banks. Global Journal of Finance and Management, 6(8), 771-776.
- Gasbarro, D., Sadguna, I. G. M., & Zumwalt, J. K. (2002). The Changing Relationship Between CAMEL Ratings and Bank Soundness During the Indonesian Banking Crisis. Review of Quantitative Finance and Accounting, 19(3), 247-260.
- Jaouad, E., & Lahsen, O. (2018). Factors Affecting Bank Performance: Empirical Evidence from Morocco. European Scientific Journal, 14(34), 255-267.
- Jreisat, A., & Bawazir, H. (2021). Determinants of Banks Profitability in The Middle East and North Africa Region. The Journal of Asian Finance, Economics, and Business, 8(6), 701-711.
- Karim, N. A., Alhabshi, S. M. S. J., Kassim, S., & Haron, R. (2018). Measuring Bank Stability: A Comparative Analysis Between Islamic and Conventional Banks in Malaysia. Proceedings of The 2nd Advances in Business Research International Conference (Pp. 169-177). Springer.
- Kassim, S. (2015). Islamic Finance and Economic Growth: The Malaysian Experience. Global Finance Journal, 30, 66-76.
- Khediri, K. B., & Ben-Khedhiri, H. (2009). Determinants of Islamic bank profitability in the MENA region. International Journal of Monetary Economics and Finance, 2(3/4), 409-426.
- Kolapo, F., Ajayi, L., & Aluko, O. (2016). How Is Size Related to Profitability? Post-Consolidation Evidence from Selected Banks in Nigeria. International Journal of Finance & Banking Studies, 5(4), 30-38.
- Ledhem, M. A., & Mekidiche, M. (2020). Economic Growth and Financial Performance of Islamic Banks: A CAMELS Approach. Islamic Economic Studies, 28(1), 47-62.
- Morakinyo, A. E., & Sibanda, M. (2016). The Determinants Of Non-Performing Loans In The MINT Economies. Journal of Economics and Behavioral Studies, 8(5), 39-55.
- Naceur, S. B., & Ghazouani, S. (2007). Stock Markets, Banks, and Economic Growth: Empirical Evidence from The MENA Region. Research in International Business and Finance, 21(2), 297-315.
- Naceur, S. B., & Omran, M. (2011). The Effects of Bank Regulations, Competition, and Financial Reforms on Banks’ Performance. Emerging Markets Review, 12(1), 1-20.
- Naceur, S. B., Ben-Khedhiri, H., & Casu, B. (2009). What Drives the Efficiency of Selected MENA Banks? A Meta-Frontier Analysis (Working Papers No. 499). Economic Research Forum.
- Nguyen, T., Locke, S., & Reddy, K. (2015). Does Boardroom Gender Diversity Matter? Evidence from A Transitional Economy. International Review of Economics and Finance, 37, 184-202.
- Nimalathasan, B. (2008). A Comparative Study of Financial Performance of Banking Sector in Bangladesh – An Application of CAMELS Rating System. Economic and Administrative Series, 2, 141-152.
- Obiora, S., Zeng, Y., Li, Q., Liu, H., Adjei, P., & Csordas, T. (2022). The Effect of Economic Growth on Banking System Performance: An Interregional and Comparative Study of Sub-Saharan Africa and Developed Economies. Economic Systems, 46(1), 100939.
- Omran, M. (2007). Privatization, State Ownership, And Bank Performance in Egypt. World Development, 35(4), 714-733.
- Rabaa, B., & Younes, B. (2016). The Impact of the Islamic Banks’ Performances on Economic Growth: Using Panel Data. International Journal of Economics and Finance Studies, 8(1), 101-111.
- Rahman, M. M., Hamid, M., & Khan, M. (2015). Determinants of Bank Profitability: Empirical Evidence from Bangladesh. International Journal of Business and Management, 10(8), 135-149.
- Rashid, A., & Jabeen, S. (2016). Analyzing performance determinants: Conventional versus Islamic Banks in Pakistan. Borsa Istanbul Review, 16(2), 92-107.
- Rashid, A., Khaleequzzaman, M., & Jabeen, S. (2015). Analyzing the Performance of Banks in Pakistan: Conventional Versus Islamic Banks. Journal of Islamic Business and Management, 5(2), 17-42.
- Rodica-Oana, I. (2014). The Evolution of Romania’s Financial and Banking System. Procedia Economics and Finance, 15, 760-768.
- Roman, A., & Sargu, A. C. (2013). Analysing The Financial Soundness of the Commercial Banks in Romania: An Approach Based on The Camels’ Framework. Procedia Economics and Finance, 6, 703-712.
- Rozzani, N., & Rahman, R.A. (2013). CAMELS and Performance Evaluation of Banks in Malaysia: Conventional Versus Islamic. Journal of Islamic Finance and Business Research, 2(1), 36-45.
- Samhan, H., & Al-Khatib, A. (2015). Determinants of Financial Performance of Jordan Islamic Bank. Research Journal of Finance and Accounting, 6(8), 37-47.
- Souissi-Kachouri, N. (2020). Corruption in The Banking Sector and Economic Growth in MENA Countries (ERF Working Paper No. 1432). The Economic Research Forum.
- Sufian, F., & Habibullah, M. (2010). Assessing the Impact of the Financial Crisis on Bank Performance Empirical Evidence from Indonesia. ASEAN Economic Bulletin, 27(3), 245-262.
- Sufian, F., & Habibullah, M. S. (2009). Bank specific and macroeconomic determinants of bank profitability: Empirical evidence from the China banking sector. Frontiers of Economics in China, 4(2), 274-291.
- Tabash, M. I. (2019). Banking Sector Performance and Economic Growth: An Empirical Evidence of UAE Islamic Banks. In M. Mateev, and P. Poutziouris (Eds), Creative Business and Social Innovations for A Sustainable Future (pp. 39-45). Cham: Springer.
- Tabash, M., & Dhankar, R. (2014). The Impact of Global Financial Crisis on The Stability of Islamic Banks: An Empirical Evidence. Journal of Islamic Banking and Finance, 2(1), 367-388.
- Talbi, D., & Bougatef, T. (2018). The internal and external determinants of the intermediation margin of banks across MENA countries. EuroMed Journal of Business, 13(3), 280-290.
- Trianto, B., Masrizal, & Sabiu, T. (2021). Can Islamic Finance Drives Economic Growth? Evidence from Indonesia. Journal Ilmu Manajemen Dan Bisnis Islam, 7(2), 141-157.
- Trung, N. (2021). Determinants of Bank Performance in Vietnamese Commercial Banks: An Application of the Camels Model. Cogent Business & Management, 8(1), 1979443.
- Wanke, P., Azad, Md. A. K., & Barros, C. P. (2016). Financial Distress and The Malaysian Dual Baking System: A Dynamic Slacks Approach. Journal of Banking and Finance, 66, 1-18.
- Yazdan, G. F., & Sadr, S. (2012). Analysis of Islamic Bank’s Financing and Economic Growth: Case Study Iran and Indonesia. Journal of Economic Cooperation and Development, 33(4), 1-24.
- Yuksel, S., Mukhtarov, S., Mammadov, E., & Özsarı, M. (2018). Determinants of Profitability in The Banking Sector: An Analysis of Post-Soviet Countries. Economies, 6(3), 41.
- Zagherd, M., & Barghi, M. (2017). Performance Evaluation of Iranian Banking Industry Through CAMELS Framework. Journal of Accounting and Marketing, 6(2), 1-7.
- Zhongming, T., Akpemah Bathuure, I., & Guoping, D. (2019). Banks Performance And Economic Growth: Evidence From West Africa. International Journal of Management Sciences and Business Research, 8(10), 168-174.
-
The impact of credit risk and macroeconomic factors on profitability: the case of the ASEAN banks
Myra V. De Leon
doi: http://dx.doi.org/10.21511/bbs.15(1).2020.03
Banks and Bank Systems Volume 15, 2020 Issue #1 pp. 21-29 Views: 1663 Downloads: 571 TO CITE АНОТАЦІЯThis study investigates the effect of credit risk and macroeconomic factors on profitability of 20 ASEAN banks, particularly from Indonesia, Malaysia, Thailand and Philippines, covering the period of 2012 to 2017. The unbalanced panel data were tested for heteroscedasticity and normality. A fixed effects model and a random effects model were utilized followed by simple ordinary least squares (OLS) regression. The obtained results show that credit risk and GDP growth negatively affect Return on Equity (ROE) at 5% level of significance. The inflation rate increases ROE by 0.323%. In terms of influence, inflation has the highest impact on ROE followed by GDP growth and credit risk. Credit risk and GDP growth negatively affect Return on Assets (ROA) at 5% level of significance. ROA was also influenced by an increase in inflation rate. Therefore, this study will help banks and bank managers, depositors, investors, policy makers and governments to identify factors affecting bank profitability.
-
The effect of longevity risks on the performance of stock market
Investment Management and Financial Innovations Volume 14, 2017 Issue #1 (cont.) pp. 173-180 Views: 1176 Downloads: 283 TO CITE АНОТАЦІЯIn this study the author examines the effect of the speed of population aging on the financial markets in 11 OECD (The Organisation for Economic Co-operation and Development) countries after controlling the proportion of labor population, the growth rate of real GDP (Gross Domestic Product), the rate of increasing productivity, inflation rate, and the rate of increasing scale of pension market. The author finds that the performance of stock market is affected by complex factors including increasing of average life expectancy, the growth rate of real GDP, the rate of increasing productivity, the inflation rate, the earning rate of stock market and the rate of increasing scale of pension market. Especially, the proportion of economically active people is the most significant factor to explain the stock market performance. Considering the decreasing proportion of economically active people in aging societies, the decrease of productivity and eventually the decrease of earnings from financial markets would be expected.
-
The impact of listing on banks’ performance: case study from Saudi Arabia
Mohammad Alsharif
doi: http://dx.doi.org/10.21511/bbs.15(3).2020.01
Using quarterly data from 2010 to 2019, this paper investigates the impact of listing status on the performance of the National Commercial Bank (NCB), the largest commercial bank in Saudi Arabia, by applying a combination of financial ratios analysis and efficient frontier analysis with a mix of parametric and non-parametric tests. The overall results show that although the NCB performance is superior compared to their counterparts, this superiority has deteriorated after the bank was listed in 2014. This result was captured by the deterioration in the efficiency measures of NCB, indicating the significance of using the efficient frontier analysis as an additional monitoring tool by the Saudi regulators. The financial ratios analysis also shows that even though the NCB profitability has increased, there is an increase in the bank’s overall risk after being listed. Therefore, Saudi regulators should closely monitor their listed banks as these banks are directed toward high-risk assets.
