Determinants of Profitability in Commercial Banks of Tajikistan (2010-2017)

Abstract

The banking system still remains relatively undeveloped in Tajikistan. According to the reports of the National Bank of Tajikistan, the main financial indicator of the commercial banks - profitability is unstable as it is fluctuating from year to years. This paper investigates the main determinants of profitability in commercial banks in the country. For this purpose, the balanced panel data of 15 commercial banks over the period of 2010-2017 was analyzed. The estimation methods used in this study is Arellano-Bover/Blundell-Bond Generalized method of moments (GMM). Return on assets (ROA) was used as a dependent variable for the profitability of commercial banks, and the independent variables are the combination of bank-level and macro indicators. The estimation demonstrated the following results. The components of bank-level factors including bank size, capital, marketing expenditure and income diversification have а significant and positive impact on bank profitability. The loan portfolio at risk, as a bank-level determinant, has significant and negative effect on profitability. Exchange rate as a macro determinant found to be significant determinant of profitability in commercial banks of Tajikistan. However, in the period under the study, remittance has turned out to be insignificant. The study suggests that the management of Tajik commercial banks should adopt policies aimed at the reduction of the level of non-performing loans. The results of the study suggest that bank managers need to diversify the income sources and not to be dependent just on lending, since the loan related assets counted to be risky. For that purpose, the managers of the banks should invest into marketing their products and proper marketing tools. In addition, the National Bank of Tajikistan, as the main regulatory authority, should develop effective policy on capital adequacy and loans to assets ratio to ensure stability and reduce exposure to negative shocks