Determinants of Profitability of Commercial Banks in Afghanistan

Abstract

Considering today’s global and complex banking environment, there is a great need to find out the key determinants of profitability of commercial banks. Due to the fact that banks are very significant financial intermediaries in an economy because profitable banking sector can better withstand negative shocks and crises and contribute to the stability of the overall economy. The objective of this study is to investigate the determinants of profitability of the commercial banks in Afghanistan for the period of six years (2011-20016). The panel data of the 10 sample banks is analyzed by using multiple linear regression models for banking profitability measures such as return on asset (ROA) and return on equity (ROE). In addition, Pooled OLS regression model was applied in order to investigate the impact of bank size, liquidity, capital adequacy, credit risk, income diversification, GDP growth and inflation. . Using return on asset as (ROA) as the main measure of profitability, the findings of the study indicate that bank size, capital adequacy and GDP have positive relationship with the bank’s profitability. On the other hand, variables such as liquidity, credit risk, income diversification and inflation are negatively correlated with the commercial banks’ profitability. Although the external variables are statistically insignificant but their signs present relevant policy implications for bankers and policy makers, that is why they should not be underestimated. The policy implication drawn from this study is that if banks are to obtain performance improvements, they should consider both bank-specific and macroeconomic variables because they are significant in explaining the profitability.