Dertminant of Firm Profitability
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- Date Submitted: 08/28/2014 11:09 PM
- Pages: 15
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1. Introduction
Banks are the backbone of the global economy, providing capital for innovation, infrastructure, job creation and overall prosperity. Banks also play an integral role in society, affecting not only spending by individual consumers, but also the growth of entire industries (Almazari A. A., 2011). As financial intermediaries, banks play an important role in the operation of an economy. Banks are the sole providers of funds, and their stability is of paramount importance to the financial system. As such, an understanding of determinants of their profitability is essential and crucial to the stability of the economy (Vong & Chan).
Efficient banking system reflects a sound intermediation process and hence the bank's due contribution to economic growth. If commercial banks are functioning efficiently, monetary policies are likely to be effective (Almazari & Almumani, 2012).
2. Literature review
There is an extensive body of literature that seeks to identify the determinants of bank performance. While some studies focus on the understanding of bank profitability in a particular country, others concentrate their analysis on a panel of countries. No matter whether it is a single country or a panel of countries study, the determinants of bank profitability can be divided into two main categories, namely internal factors and external factors.
2.1 Internal determinants
Internal determinants of bank performance can be defined as factors that are influenced by a bank’s management decisions. Such management effects will definitely affect the operating results of banks. Although a quality management leads to a good bank performance, it is difficult, if not impossible, to assess management quality directly. In fact, it is implicitly assumed that such a quality will be reflected in the operating performance. As such, it is not uncommon to examine a bank’s performance in terms of those financial variables found in those financial statements. Of...
Banks are the backbone of the global economy, providing capital for innovation, infrastructure, job creation and overall prosperity. Banks also play an integral role in society, affecting not only spending by individual consumers, but also the growth of entire industries (Almazari A. A., 2011). As financial intermediaries, banks play an important role in the operation of an economy. Banks are the sole providers of funds, and their stability is of paramount importance to the financial system. As such, an understanding of determinants of their profitability is essential and crucial to the stability of the economy (Vong & Chan).
Efficient banking system reflects a sound intermediation process and hence the bank's due contribution to economic growth. If commercial banks are functioning efficiently, monetary policies are likely to be effective (Almazari & Almumani, 2012).
2. Literature review
There is an extensive body of literature that seeks to identify the determinants of bank performance. While some studies focus on the understanding of bank profitability in a particular country, others concentrate their analysis on a panel of countries. No matter whether it is a single country or a panel of countries study, the determinants of bank profitability can be divided into two main categories, namely internal factors and external factors.
2.1 Internal determinants
Internal determinants of bank performance can be defined as factors that are influenced by a bank’s management decisions. Such management effects will definitely affect the operating results of banks. Although a quality management leads to a good bank performance, it is difficult, if not impossible, to assess management quality directly. In fact, it is implicitly assumed that such a quality will be reflected in the operating performance. As such, it is not uncommon to examine a bank’s performance in terms of those financial variables found in those financial statements. Of...