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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.
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    Keywords

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    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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