The Effect of Credit Risk on the Banking Profitability: A Case on Bangladesh

Abstract

The study aims to find the effect of credit risk on profitability of the banking sectors of Bangladesh. The study uses an unbalanced panel data and 172 observations from 18 private commercial banks from 2003 to 2013. The study uses NPLGL, LLRGL, LLRNPL and CAR as credit risk indicators and ROAA and ROAE and NIM as profitability indicators. Using OLS random effect model, GLS and system GMM the study finds a robust negative and significant effect of NPLGL, LLRGL on all profitability indicators. The analysis also finds a negative and significant effect of CAR on ROAE. As an additional analysis, the results reveal that the effect of the implementation of Basel II is significantly positive on NIM but significantly negative on ROAE. The analysis reveals some significant policy implications for increasing profitability and protecting banks from crisis.