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Effect of Basel III Liquidity Ratio LCR and NSFR on the Profitability of Commercial Banks in Bangladesh

Author

Listed:
  • Subrata Deb Nath
  • Munna Rani Biswas
  • Md. Abdul Maleque M.M Mohitur Islam

Abstract

Purpose: Commercial banks play a crucial role in the sustainable economic development of any economy. They are dominating the banking sector of Bangladesh. Recently Commercial banks are facing a severe liquidity crisis, in spite of maintaining LCR and NSFR above the lowest supervisory regulation. Therefore, the aim of this research is to determine the effect of Basel III liquidity ratio LCR and NSFR on the profitability of commercial banks in Bangladesh. Design/Methodology/Approach: This study alphabetically selects 14 commercial banks as sample for secondary panel data for 9 years’ time span (2015-2023) and uses ROE, ROA as dependent variables and LCR, NSFR, NPL as independent variables for random effects regression analysis. Moreover, at the very beginning, panel unit root test is conducted to verify the stationary property of all study variables and then performed Hausman specification test to select appropriate regression model. Findings: Study results show that LCR has statistically significant negative effect whereas NSFR has positive impact on the profitability state owned commercial banks in Bangladesh, i.e. if LCR increases in 1 unit, it decreases profitability by 0.067 unit, whereas if NSFR increases in 1 unit, it raises profitability by 0.5141 unit. Moreover, study also shows strong negative influence of NPL on the profitability of commercial banks. Practical Implications: Management of respective banks, regulators like central bank, ministry of finance etc., academic researchers, journalists and other stake holders may utilize the outcome of this research for proper liquidity management, future research reference regarding liquidity management. Originality value: Research study regarding the impact or effect of Basel III liquidity ratio on the profitability of commercial banks is hardly available in the context of Bangladesh. Hence, this is a pioneering effort to examine the effect of Basel III liquidity ratio LCR and NSFR on the profitability of commercial banks in Bangladesh.

Suggested Citation

  • Subrata Deb Nath & Munna Rani Biswas & Md. Abdul Maleque M.M Mohitur Islam, 2024. "Effect of Basel III Liquidity Ratio LCR and NSFR on the Profitability of Commercial Banks in Bangladesh," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(3), pages 12-28.
    • Handle: RePEc:ers:ijebaa:v:xii:y:2024:i:3:p:12-28
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    References listed on IDEAS

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    1. Asian Business Consortium & Parvin, Shahnaz & Chowdhury, A. N. M. Minhajul Haque & Siddiqua, Ayesha & Ferdous, Jannatul, 2019. "Effect of Liquidity and Bank Size on the Profitability of Commercial Banks in Bangladesh," OSF Preprints 5g2q4, Center for Open Science.
    2. Farouq Altahtamouni & Shikhah Alyousef, 2021. "The Effect of Liquidity According to the Requirements of the Basel III Committee on the Profitability of Banks: Evidence from Saudi Banks," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 439-463.
    3. Sekoni, Abiola, 2015. "The Basic Concepts and Feature of Bank Liquidity and Its Risk," MPRA Paper 67389, University Library of Munich, Germany.
    4. Parvin, Shahnaz & Chowdhury, A. N. M. Minhajul Haque & Siddiqua, Ayesha & Ferdous, Jannatul, 2019. "Effect of Liquidity and Bank Size on the Profitability of Commercial Banks in Bangladesh," Asian Business Review, Asian Business Consortium, vol. 9(1), pages 7-10.
    5. Shireen Mahmoud Alali, 2019. "The Impact of Bank Liquidity on the Profitability of Commercial Banks: An Applied Study on Jordanian Commercial Banks for the Period (2013/2017)," International Journal of Economics and Financial Issues, Econjournals, vol. 9(5), pages 24-28.
    6. Sardar Shaker Ibrahim, 2017. "The Impacts of Liquidity on Profitability in Banking Sectors of Iraq: A Case of Iraqi Commercial Banks," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 6(1), pages 113-121, January.
    7. Izabela Jędrzejowska-Schiffauer & Peter Schiffauer & Eleftherios Thalassinos, 2019. "EU Regulatory Measures Following the Crises: What Impact on Corporate Governance of Financial Institutions?," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 432-456.
    8. Humaira Begum & Md. Mamunar Rashid & Mohammad Samiul Haque & Mohammad Main Uddin, 2022. "Effect of Liquidity on Profitability of Banks using Revisited Panel Data Analysis: Does Ownership Structure Matter?," International Journal of Asian Social Science, Asian Economic and Social Society, vol. 12(6), pages 205-216.
    9. Muhammad Shaukat Malik & Mustabsar Awais & Aisha Khursheed, 2016. "Impact of Liquidity on Profitability: A Comprehensive Case of Pakistan¡¯s Private Banking Sector," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(3), pages 69-74, March.
    10. Veeramoothoo, Sathiavanee & Hammoudeh, Shawkat, 2022. "Impact of Basel III liquidity regulations on U.S. Bank performance in different conditional profitability spectrums," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
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    More about this item

    Keywords

    Basel III liquidity ratio; LCR; NSFR; profitability; SOCB.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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