Determinants of Profitability in Commercial Banks of Kyrgyzstan

Abstract

This research investigates the main determinants of profitability in commercial banks of Kyrgyzstan. For this purpose balanced panel of 18 commercial banks over the period of 2009-2016 was analyzed. Arellano-Bover/Blundell-Bond linear dynamic panel estimation was used with return on assets ratio as dependent variable and combination of bank-specific, industry-specific and macroeconomic indicators as independent variables. The estimation results demonstrate that bank size and income diversification, as well as expenses management and funding structure have positive effect on bank profitability. Effects of bank capitalization, liquidity risk, lending specialization are insignificant. Foreign, state-owned banks and those that are under direct supervision of National bank earn less but the effect is insignificant as well. Engaging in banking activities in accordance with Islamic finance and poor quality of loan portfolio negatively influence profitability. Bank profits are pro-cyclical and interact positively with remittances. The effect of inflation is insignificant.