Analysis of Bank Performance Determinants

The assignment involves a thorough examination of the factors that influence bank profitability in different economic environments. It includes a literature review of existing research papers and studies, which provide insights into the determinants of bank performance. The document also discusses the implications of these findings for banking regulation and practice.

1
The Impacts of bank-specific determinants and
macroeconomics determinants on
the profitability of banks. A comparative study of
OMAN and UAE

2
TABLE OF CONTENTS
INTRODUCTION.............................................................................................................................. 3
Title or topic area of proposed study........................................................................................3
What is the aim of the study?...................................................................................................3
What are the objectives of your study?....................................................................................3
What is the rationale for your study?........................................................................................3
BRIEF REVIEW OF RELEVANT LITERATURE...............................................................................5
Provide a concise outline of research methodology.......................................................................10
Research Strategy..................................................................................................................11
Research Design....................................................................................................................11
Sampling:............................................................................................................................... 11
Project Plan ........................................................................................................................... 12
References .................................................................................................................................... 13

3
INTRODUCTION
Title or topic area of proposed study
The Impacts of bank-specific determinants and macroeconomics determinants on the profitability of banks
- A comparative study of OMAN and UAE
What is the aim of the study?
Aim of study is to identify impact of bank-specific determinants and macroeconomics determinants on
profitability of banks in Oman and UAE.
What are the objectives of your study?
Objective of study is to examine external and internal determinants which affect bank’s profitability.
The further breakdown of objective is given as below:
1. To investigate influence of capital adequacy on profitability of banks.
2. To investigate influence of credit risk on profitability of banks.
3. To investigate influence of bank size on profitability of bank.
4. To investigate the influence of inflation on profitability of bank.
5. To investigate influence of GDP on profitability of bank.
What is the rationale for your study?
Banks are considered as the backbone of every economy. Banking sector plays an enormous role in
reinforcing the economic growth and country’s prosperity, whereby it sustains financial stability with its
huge contribution through effective use of the financial resources in all over the economy. (Masood &
Ashraf, 2012). Moreover, the profitable and sound banking system in an economy is more crucial to
improve the financial stability of any country along with its economic growth, so the economic

4
turbulences and crisis, uncertainties of external shocks can be avoided by solid economies. This study will
be conducted to analyze stability of banking system in Oman as well as in UAE. Profitability of banks and
their generation of higher revenues in any economy reflects economic character of any country and
contributes in country’s infrastructure. On contrary, if banking system in any economy collapses or faces
insolvency, this in turn will lead to lack of country’s growth, economic deficits, increase government
debts and damage the country’s reputation (Athanasoglou, et al., 2008).
Further, spillover impacts can be generated on various sectors of the country, due to the crisis stem from
the banking sector, and this may cause systemic risk in the economy. Banks are important pillars in
countries, whereby they can provide fund and loans to local companies of any particular country in order
to expand their businesses internally or internationally (reference). The banks also contribute in the
establishment and creation of new business ventures in any country through various forms and means
such as providing those companies with capital (Athanasoglou, et al., 2008). Therefore, this will boost the
country’s economy and lead towards progression. Banks need to generate higher profits and revenues for
the sake of gaining trust of public, shareholders, investors and depositors in order to be more efficient and
competitive. As a result, this will positively influence the political and economic stability of country
(UNDP, 2009). In addition, all these factors indicate that the banking sector has been always taken into
consideration, due to its importance in the economy, and also the profitability of banks has been always a
considerable issue for almost every country around the world (Cole, 1974). The bank’s profitability
captures the interests of government, Central Banks, shareholders and depositors. (Cole, 1974). Hence, it
is important to analyze determinants of banks profitability to ensure sustainability and enhancement of the
economic situation in Oman and UAE. Moreover, primary purpose of conducting this research is to
identify impacts of banks specific determinants and macroeconomic determinants on profitability of the
banks in Oman and UAE. For analysis purpose, various variables have been studied under financial
institutio specific determinant’s category and macroeconomic determinants category on banks
profitability. These variables are capital adequacy, bank size, credit risk, inflation and GDP. In
computation of these factors, the standard equation has been connected so we accomplish the exact figures
to be more guaranteed that the outcomes will be more trust-able. The results of this examination
demonstrate productive for investors, government, and financial specialists when the turns come identified
with settle on any choice regarding making an interest in some task or need to actualize the new
arrangement (Al-Malkawi and Pillai, 2018). Besides, for financial specialists, this examination
investigates the most beneficial bank which creates more comes back with less hazard risk, so they can
settle on the correct choice to make an interest in banks. This would be fundamentally valuable for banks
to have sound understanding identified with components influencing bank's benefit along these lines, it
could be useful to the bank to recognize the variables which cause influencing the bank's execution, and
the sound moves can make place to enhance the general execution of banks.

5

6
BRIEF REVIEW OF RELEVANT LITERATURE
Banks play a pivotal role in improving the financial stability of any economy. If the banks provide
profitable returns more, country’s economy always move towards upward and there will be no sign of
occurrence of a financial crisis. For this assessment, the profitability of banks analyzes by identifying the
internal and external determinants which behind to affect the bank’s performance or profitability. In
internal determinants, all the bank-specific determinants come which heavily affected due to top
management decisions of the banks, e.g., capital adequacy, risk management, bank size, operating
efficiency and liquidity management. Moreover, in external determinants, the factors related to industry-
specific and macroeconomic determinants enrolls. In industry-specific determinants, all those factors can
include which affects the profitability of banks but don’t be influenced directly by top management
decisions of banks. In macroeconomic factors, the GDP and the inflation can use as an example (Perera, et
al., 2013).
(Alper & Anbar, 2011) conducted study on investigating the bank’s profitability by incorporating
macroeconomic determinants and bank-specific factors. This study has been conducted in commercial
banks and the region covered is Turkey. Moreover, the bank’s profitability has been analyzed in between
2002-2010. For analyzing the bank’s profitability, researcher adopts two variables i.e. ROA and ROE as a
proxy. In this study, the researcher applied fixed effect model along with panel data implementation. The
outcomes highlight that only real interest found significantly related to bank’s profitability in the light of
macroeconomic variable. Moreover, it can be stated that one percent increase in interest rate pushes the
bank's profitability towards increased proportion by 1%.
Bank profitability and factors are easily identified with the help of internal or external analysis. This is the
necessary process of analyzing effective process learning This study covered time period of 1998-2002
and incorporated panel data which analyzed banking data of seven SEE countries. The SEE countries
entail Albania, FYROM, Croatia, Serbia-Montenegro, Bosnia-Herzegovina, Bulgaria and Romania. In this
study, the researcher applied random effect model regression for analysis of results. The results highlight
that bank’s profitability strongly affects the inflation in SEE countries. On the contrary, real per capita
income doesn’t possess satisfactory result due to research limitations covered in the limited time period.
The other study conducted by (Aburime, 2008) conducted a study in Nigerian banking sector and analyze
the relationship between bank profitability and macroeconomic determinants. The researcher analyzed
information in between 1980-2006 and covered 154 banks which evidence 1255 observations related to
unbalance panel aggregation. The result evidenced that inflation, foreign exchange regime, monetary
policy and interest rate are the significantly good impact on banks profitability measured by return on
assets. On contrary, stock market development and banking sector development as well as financial
structure don’t highlight any positive association with profitability of banks.

7
Moreover, (Vong & Hoi, 2009) conducted a study and analyzed the macroeconomic determinants effects
on bank’s profitability. The results show that only inflation possesses significant association with
profitability. Study further evidences. Besides, banks helps to findout the best solution to overcome from
the inflations. On country, other variable of the studies which termed as economic growth and interest
rate have no positive impact on bank’s profitability measured by return on asset.
Additionally, (Ramadan, et al., 2011) conducted a study on Jordanian banking sector to evaluate its
profitability. I this study the data has been covered from 2001-2010, and the sample size was considered
as 10 Jordan banks. Fixed effect regression model has been implemented by incorporating balanced panel
data. study submits the evidence that bank’s performance or profitability in Jordanian banking sector has
been influenced by bank-specific determinants only. On the contrary, it is further mentioned that low
credit risk, well-capitalized banks, high lending activities and efficient cost management have a
significant relationship with bank’s profitability. Moreover, macro enviornmenet helps to influence many
activities of the organisation. They also helps to determine the major objectives of the organisation. This
also make predict the negative influences of company.
(Khrawish, 2011) conducted study and investigate the bank's performance by judging the bank related
factors. This study has been covered in Jordan bank sector from 2000-2010. The model implemented in
this study has been adopted by previous research (Naceur and Goaied, 2010). The outcomes of the study
show that annual growth rate and inflation found insignificant with bank’s profitability measured by
return on equity and return on asset.
Moreover, (Pasiouras & Kosmidou, 2007) conducted a study on European banking sector. In this study,
the bank performance has been evaluating from 1995-2001. The study comprises the whole banking
sector of European countries including foreign and local banks. The sample size of the study found as 584
banks of Europe banks which operates under fifteen distinctive European countries, which finalize the
4088 observations for the implementation of the test model. The fixed effect regression model has been
applied in this study which splits out the results into three distinctive categories. One category shows that
all banks mandatory to considered simultaneously, while the rest of the banks further splits up according
to their origin country basis, which indicates the sub samples of the bank as 332 banks enroll as local
commercial bank and 218 banks considered as foreign banks (Saif-Alyousfi, Saha and Md-Rus, 2018).
The results of the study show that besides the ownership variable, the internal characteristics of the bank
and overall changes in bank environment possess significant impact on the profitability of banks. On the
contrary, the GDP and inflation both possess some relationship with all categories of the bank, which
shows opposite related to local banks, shows the positive relationship and the negative linkage with
foreign banks. The researcher provides the arguments that the reason behind the occurrence of mixed
results is the distinctive knowledge of the economic conditions of the country along with distinctive
customer segments which possess versatile responses under equilibrium conditions.

8
Return on Assets used majorly by most of the researcher to analyze the profitability of banks. This
variable provides the true idea of bank’s profitability and reflects the actual bank position on today’s date.
ROA can calculate by applying the formula which shows the division of total net income with total assets.
In many countries, this ROA adopted as the most vital indicator to evaluate the bank’s profitability by
numerous research experts. A study conducted by (Obamuyi, 2013) on banking sectors submit the
outcomes which highlight that return on assets found more superior as compared to return on equity. The
return on asset highlights the profit earned at the basis of each asset’s unit which identifies the bank’s
capability for the successful utilization of fiscal and real asset for the sake of profit generation. On the
contrary, return on equity points out the financial leverage of banks.
Moreover, some researchers have an objection to considering the return on the asset as the strong
indicator for the reflection of bank’s profitability. (Alexiou & Sofoklis, 2009) highlighted that in certain
situations return on assets creates biasness because of exclusion of the off-balance sheet activities.
Another study has been done by (Goddard, et al., 2004) who adopt return on equity as the indicator of
bank’s profitability and they provide justification that off-balance sheet activities possess significant
positive contribution for generating more profits for the European banking sector so, the ROE is a better
indicator to implement.
Capital adequacy illustrates the strength of bank’s capital regarding the bank’s risk. The measure
highlights the soundness and safety of the bank. The researcher used the equity to asset ratio as the proxy
to evaluate the bank’s capital adequacy. (Berger, 2005) highlights the outcome of his study that shows the
significant positive relationship of capital adequacy to bank’s profitability. This study has been conducted
in the USA and provides the evidence that the banks which are well-capitalized have better capability to
bear uncertain situation and suffer huge losses along with the excellent capability of handling the
shareholder’s risk. Eventually, it makes the reduction of the forthcoming bankruptcy cost. Moreover, the
bank with large capital resources grabs more share of deposits and more investment which provides the
enormous contribution in order to increase the bank’s revenue (Hassan and Aliyu, 2018).
Furthermore, the credit risk provides the highlights of the likelihood which illustrates that the customers
are not capable of making payment of the debt honored in full settlement at the date matured which leads
banks to lose their outstanding loans on the certain parties. (Boahene, et al., 2012) conducted study and
provides the outcomes which illustrate that there is significant positive relationship exist between bank’s
profitability and credit risk and the finding of the study demonstrates that Banks of Ghana tends to receive
more advantage with the higher credit risk because it generates more incomes for increasing the bank’s
profitability. It further highlighted that the significant positive relationship between credit risk and bank’s
profitability completely provide supporting to a risk-return theory which highlights that Banks of Ghana
performs their operations in a high credit risk environment with the probability to receive more ultimate
returns.

9
Additionally, Bank’s size used for the evaluation of linkage between bank’s increasing growth and its
size. This variable use for proving the existence of economic of scale theory. (Alexiou & Sofoklis, 2009)
gives an explanation that the existence of a positive relationship between bank’s profitability and the
bank’s size is the complete evidence that the large bank’s size in the economy fully achieves the
economies of scale.
Another study conducted by (Roman & Danuletiu, 2013) on Romanian banking sector. They illustrated
that GDP possess the significant positive impact on bank’s profitability. The study highlights that by the
increase of GDP the economic growth will increase and the demand for the financial services also
increase for instance loans and deposits.
Moreover, the other study mentioned by (Ameur & Mhiri, 2013) showed that the increase in inflation
cause to affect the economies of the country and it reduces the buying power of the consumer. It also
showed that the increase in inflation cause to create the difficulty in free cash-flow which terminates the
loan arrangement that prior to be managed for the precipitation loan losses. The macroeconomic factors
like that of GDP of that country would be affecting the performance of banking sector on large bases. This
is the obvious factor which is affecting performance of the banks other than this inflation rate is also
another element which is impacting their profits (Al-Gasaymeh, 2018). If GDP is increasing within that
country then this would ultimately lead to higher profitability for the banking sector this will also b
decreasing risk of default that is lowering down the loss of banks. So this shows that if there is higher
GDP in country there would be higher demand for both interest and non interest activities of bank thus
improvement in their profitability and performance of bank.
So all the above mentioned factors whether that of GDP or inflation or that of capital adequacy and credit
risk all factors are those which have their own impact on the profitability of bank. Profit for Assets
utilized significantly by the greater part of the scientist to examine the benefit of banks (Mansour and
Bhatti, 2018). This variable gives the genuine thought of bank's profitability and mirrors the real bank
position on the present date. ROA can compute by applying the equation which demonstrates the division
of aggregate net wage with add up to resources. In numerous nations, this ROA embraced as the most
fundamental pointer to assess the bank's benefit by various research specialists. The outcomes
demonstrate that exclusive swelling has huge relationship with productivity. Concentrate additional
confirmation that the banks in Macau have finds the answer for make benefits in inflationary conditions in
the nation. On the nation, the other variable of the examinations which named as monetary development
and loan fee have no positive effect on bank's productivity estimated by return on resource. in outer
determinants, the elements identified with industry-particular and macroeconomic determinants selects. In
industry-particular determinants, each one of those elements can incorporate which influences the
profitability of banks yet don't be affected straightforwardly by top administration choices of banks. In
macroeconomic components, the GDP and the swelling can use for instance (Duqi and Al-Tamimi, 2018).

10
The results feature that exclusive genuine premium discovered essentially identified with bank's benefit in
the light of macroeconomic variable. Additionally, it can express that one percent expansion in loan fee
drives the bank's profitability towards increment extent by 1%. The SEE nations involve Albania,
FYROM, Croatia, Serbia-Montenegro, Bosnia-Herzegovina, Bulgaria, and Romania. In this examination,
the analyst connected irregular impact demonstrate relapse for the investigation of results. The outcomes
feature that bank's benefit unequivocally influences the swelling in SEE nations. In actuality, genuine per-
capita wage doesn't have agreeable outcome because of research restrictions canvassed in the constrained
day and age (Belkhir and Soumaré, 2018).

11
Provide a concise outline of research methodology

12
Research Strategy
This research does not consider any new project as various studies have been conducted previously in
many countries as well as Oman too which analyze the bank’s profitability with the incorporation of
different variables (Akguc and Al Rahahleh, 2018). But, this research will provide the new insight of the
impact of bank-specific determinants and macroeconomic determinants on the profitability of banks. A
comparative analysis of Oman and UAE. This comparative analysis makes the study unique as there is no
evidence found which have been done yet and reflects the same as I am going to research in my study.
Moreover, this research highlights the quantitative approach and all data will gather from different
secondary sources. This quantitative research points out that the research shows the inductive approach
has been incorporated into it. On the contrary, this research provides the evidence of incorporation of
mono-method, as it will totally base on the single paradigm which is quantitative approach and the data
will have collected from the secondary sources.
Research Design
It is quantitative research study, so all data will be collected from the bank’s annual reports. This study
shows the comparison of two countries Oman and UAE. So, data will be collected from the top 10 banks
of each country. It reflects the sample size of the whole study as 20 banks. Moreover, the data will be
collected from 2012-2017, a six-year study will be conducted. After gathering the data, the Pooled OLS
regression model will be applied. The reason behind implication of Pooled OLS regression model is that it
does not create the distortion between dependent and independent variable if there is the absence of the
time effect.
Sampling:
There are 17 licensed foreign and local banks and 2 specialized bank in Oman whereas in UAE there
numbers is around 23 in the last quarter of 2017 so in this study about 10 banks from each countries were
chosen. This was from the sample size of total banks of both countries (Rizwan, Moinuddin and Ashraf,
2018).
Banks from Oman:
Alizz Islamic Bank, Bank Muscut, National Bank of Oman, Oman Arab bank, Ahil Bank, bank Melli Iran,
Bank Nizwa, Bank of Baroda, EFG Hermes Oman LLC and Qatar national Bank.
Banks of UAE:
UAE bank, Abu Dhabi commercial bank, Abu Dhabi Islamic bank, Arab bank Plc., Arab Emirates
Investment bank, Bank of Sharjah, Commercial Bank of Dubai, First Gulf Bank, HSBC Bank
Middle East Limited and Noor Bank
These all banks were chosen as they are the one which are most common and famous banks

13
having profitability higher than those which are not been included within this.
Project Plan
Gantt Chart
The List Of Actions To Be
Complete
Starting Date Ending Date
Preparing A Proposal 15th of April 2018 30th of April 2018
Decide The Research
Objectives
11th of June 2018 25th of June 2018
First meeting with the
supervisor (on Skype)
26th of June 2018 26th of June 2018
Choose A Most Appropriate
Research Strategy
27th of June 2018 11th of July 2018
Describe Problem
Statement
11th of July 2018 25th of July 2018
Second meeting with the
supervisor (on Skype)
26th of July 2018 26th of July 2018
Gather The Secondary Data 27th of July 2018 9th of August 2018
Analyze The Data 9th of August 2018 23rd of August 2018
Third meeting with the
supervisor (on Skype)
23rd of August 2018 23rd of August 2018
Information Editing 24th of August 2018 1st of September 2018
Rechecking And
Formatting
1st of September 2018 8th of September 2018
Completing writing 8th of September 2018 22nd of September 2018
The Fourth meeting with
the supervisor in university
24th of September 2018 24th of September 2018
Checking and Revising 24th of September 2018 24th December 2018
Final meeting with the
supervisor in university
3rd of January 2019 3rd of January 2019
Final Submission 14th of January 2018 14th of January 2019

14
References
Cole, D.C., 1974. Financial deepening in economic development.
Aburime, 2008. Determinants of Bank Profitability: Macroeconomics Evidence from Nigeria. Lagos
Journal of Banking, Finance and Economics.
Akguc, S. and Al Rahahleh, N., 2018. Effect of Shariah Compliance on Operating Performance:
Evidence from GCC Countries. Emerging Markets Finance and Trade, (just-accepted).
Al-Gasaymeh, A., 2018. Economic Freedom, Country Risk and Cost Efficiency in Jordan and the
GCC Countries. Global Business Review, p.0972150917749292.
Al-Malkawi, H.A.N. and Pillai, R., 2018. Analyzing financial performance by integrating conventional
governance mechanisms into the GCC Islamic banking framework. Managerial Finance.
Alexiou and Sofoklis, 2009. Determinants of bank profitability: Evidence from the Greek banking
sector. Economic Annals, 54(182), pp. 0013-3264.
Alper and Anbar, 2011. Bank Specific and Macroeconomic Determinants of Commercial Bank
Profitability: Empirical Evidence from Turkey. Business and Economic Research Journal, 2(2),
pp. 139-152.
Ameur and Mhiri, 2013. Explanatory factors of bank performance: Evidence from Tunisia.
International Journal of Economics, Finance and Management, 2(1), pp. 143-151.
Athanasoglou, Brissimis and Delis, 2008. Bank-specific, industry-specific and macroeconomic
determinants of bank profitability. Journal of International Financial Markets, Institutions and
Money, 18(2), pp. 121-136.
Belkhir, M., and Soumaré, I., 2018. Islamic banks and political risk: International evidence. The
Quarterly Review of Economics and Finance.
Berger, 2005. The Relationship between capital and earnings in banking. Journal of Money, Credit and
Banking, 27(2), pp. 432-456.
Boahene, Dasah and Agyei, 2012. Credit risk and profitability of selected banks in Ghana. Research
Journal of Finance and Accounting, 3(7), pp. 2222-2847.
Duqi, A. and Al-Tamimi, H., 2018. The Impact of Owner’s Identity on Banks’ Capital Adequacy and
Liquidity Risk. Emerging Markets Finance and Trade. 54(2). pp.468-488.
Goddard, Molyneux and Wilson, 2004. Dynamics of growth and profitability in banking. Journal of
Money Credit and Banking, 36(3), pp. 1069-1090.
Hassan, M.K. and Aliyu, S., 2018. A contemporary survey of islamic banking literature. Journal of
Financial Stability. 34. pp.12-43.
Khrawish, 2011. Determinants of Commercial Banks Performance: Evidence from Jordan.
International Research Journal of Finance and Economics, Issue 81.
Mansour, W. and Bhatti, M.I., 2018. The new paradigm of Islamic corporate governance. Managerial
Finance.
Masood & Ashraf, 2012. Bank-specific and macroeconomic profitability determinants of Islamic
banks: The case of different countries. Qualitative Research in Financial Markets, 4(3), pp. 255-
268.
Obamuyi, 2013. Determinants of bank‟s profitability in a developing economy: Evidence from
Nigeria. Organizations and Markets in Emerging Economies, 4(2), pp. 97-109..