The Effect of Capital Adequacy ratio on the profitability of Commercial Bank in Bangladesh.

Abstract

This study investigates the impact of capital adequacy and other financial and macroeconomic

variables on the profitability of private commercial banks in Bangladesh. Using panel data

collected from 10 listed banks over the period 2014 to 2023, the analysis employs various

econometric techniques including Fixed Effects, Random Effects, Generalized Least Squares

(GLS), and Pooled Ordinary Least Squares (OLS). Profitability is measured by Return on Assets

(ROA) and Return on Equity (ROE), while independent variables include Capital Adequacy Ratio

(CAR), Non-Performing Loan (NPL) ratio, Equity Capital to Total Asset Ratio, Bank Size, Total

Loan to Total Deposit ratio, GDP growth, inflation, and interest rate spread. The findings reveal

that the Capital Adequacy Ratio shows limited significance in simpler models but becomes

positively associated with profitability in the GLS model, suggesting its conditional importance.

The NPL ratio and high equity levels negatively affect profitability, while interest rate spread and

bank size are significant positive contributors. Macroeconomic variables such as GDP growth

show a mild positive impact, while inflation negatively influences bank earnings. Diagnostic tests

confirm the presence of heteroscedasticity, autocorrelation, and cross-sectional dependence

methods. Overall, the study concludes that bank profitability is shaped by a combination of internal

financial practices and external economic conditions. It recommends that banks maintain an

optimal capital structure, improve credit risk management, use digital technology for efficiency,

and align financial strategies with economic trends. The research contributes to a deeper

understanding of how capital adequacy and related variables influence the performance of

commercial banks in emerging economies