Banks' Profitability and the Effects of Risk and Competition in Bangladesh

Abstract

After the independence of Bangladesh, it has seen a phenomenal expansion of its banking sector since the liberalization policy was implemented in the 1980s. Only four domestic banks (Sonali Bank, Pubali Bank, Rupali Bank, and Janata Bank) existed in Bangladesh prior to the liberalization policy, and they were all nationalized. Only three foreign banks were present. There was no private bank, though. As a result, Bangladesh's banking sector was completely void of competition. Four nationalized banks controlled a large portion of the banking market. Bank profitability was very inadequate as a result of risk and competition. The risk and competition for making a profit are still present in the banking industries. We are making every effort to learn as much as we can about the risk and competition facing Bangladeshi banks. Bank lending rates were used as a stand-in for interest rates, and return on assets and return on equity were used to gauge how profitable the banks were. In the study, the failure model was employed to observe how interest rates affected profitability. According to the findings, private banks, as opposed to public sector banks, are more impacted by interest rates on ROA and ROE. In order to systematically start investigating the cause-and-effect relationships between competition, innovation, taking risks, and profitability in the Bangladesh banking industry, we introduce a new perspective. Structural equation modeling (SEM) is used to test our hypothesis, and the empirical findings demonstrate that i. taking risks is highly associated with profitability; (ii) digitization strongly affect both risk-taking and profitability, with both direct and indirect effects on profitability; (iii) While competition has a negative impact on risk taking, it has a positive impact on both advancement and profitability, and its effects on risk-taking and profitability are both direct and indirect; (iv) Market competition, bank innovation, risk-taking, and profitability are all correlated with one another. Keywords: Banks, risk evaluation, rivalry, cash flow, and research hypotheses