1. Home
  2. Volume 6 - Number 3
  3. Financial strength of banking sector in Bangladesh: a CAMEL framework analysis
New submission
Issues
Journal Information
Aims and ScopeEditorial BoardEditorial Advisory BoardJournal Policies
Resources
For Readers
For Authors
For Editors
For Reviewers
Publication EthicsCall for Special Issue
ISSN
ISSN 2615-9821
ISSN(Previous) 2588-1396

Volume 6 - Number 3 | November 2022

Financial strength of banking sector in Bangladesh: a CAMEL framework analysis

Farhana Afroj

02/11/2022 145 0 0
Like Buy now 20.000 đ
Financial strength FSI CAMEL framework Bank Bangladesh

Abstract:

Purpose
This paper investigates the financial strength of banks in Bangladesh and factors affecting the financial strength over the years 2010–2015 on 35 banks.
Design/methodology/approach
Additive value function with CAMEL rating (capital stength, asset quality, managerial efficiency, earning ability, liquidity) has been employed to calculate banks’ financial strength index (FSI). In the second stage, panel regression has been exercised to find out the determinants of banks’ financial strength.
Findings
Empirical finding exhibits that the Islamic banks of Bangladesh are financially stronger and outperform conventional and Islamic window banks with higher liquidity. In the ownership category, private banks have more financial strength with higher capital strength, asset quality, managerial efficiency and earning ability than public banks. Bank size, loan recovery, salary and banking sector development positively affect whereas the loan-asset negatively affect the bank’s financial strength in Bangladesh.
Research limitations/implications
This study has its limitations despite its importance. CAMELS is a more improved form than using CAMEL. But because of the data deficiency on “S” which represents sensitivity, it would not be possible to use CAMELS framework. Further researchers could incorporate this.
Practical implications
Government and banks should allow Islamic banks to enter the market on easy terms because of their outstanding performance in the existing market. In addition, banks should provide loans with consideration so that they cannot create credit risk. In addition, they should calculate composite financial strength annually to understand which components they need to work on.
Originality/value
This study extends the extant result on the composite FSI. It is hard to examine the financial strength of banks using only ratio value, which misleads most of the time. The study offers evidence on how the FSI provides more rigorous results and what are the factors contribute most to the financial strength of banks.

References:

  1. Adesina, K.S. (2021), “How diversification affects bank performance: the role of human capital”, Economic Modelling, Vol. 94, pp. 303-319, doi: 10.1016/j.econmod.2020.10.016.
  2. Ahmad, A.U.F. and Hassan, M.K. (2007), “Regulation and performance of Islamic banking in Bangladesh”, Thunderbird International Business Review, Vol. 49 No. 2, pp. 251-277, doi: 10.1002/tie.20142.
  3. Alarussi, A.S. and Alhaderi, S.M. (2018), “Factors affecting profitability in Malaysia”, Journal of Economic Studies, Vol. 45 No. 3, pp. 442-458, doi: 10.1108/JES-05-2017-0124.
  4. Ali, M. and Puah, C.H. (2019), “The internal determinants of bank profitability and stability: an insight from banking sector of Pakistan”, Management Research Review, Vol. 42 No. 1, pp. 49-67, doi: 10.1108/MRR-04-2017-0103.
  5. Ariss, R.T. (2010), “Competitive conditions in islamic and conventional banking: a global perspective”, Review of Financial Economics, Vol. 19 No. 3, pp. 101-108, doi: 10.1016/j.rfe.2010.03.002.
  6. Balasundaram, N. (2008), A Comparative Study of Financial Performance of Banking Sector in Bangladesh. An Application of CAMELS Rating System, Annals of University of Bucharest, Economic and Administrative Series, No. 2, pp. 141-152.
  7. Barron, H. and Schmidt, C.P. (1988), “Sensitivity analysis of additive multiattribute value models”, Operations Research, Vol. 36 No. 1, pp. 122-127, doi: 10.1287/opre.36.1.122.
  8. Berhani, R. and Sejdini, A. (2016), “An empirical evaluation of the determinents of Albanian banks’ profitability by focusing on the relationship between bank profitability and staff salary”, International Journal of Economics, Commerce and Management, Vol. IV No. 6, pp. 19-41.
  9. Çekrezi, A., Shanini, E., Saadaoui, M. and Mekkaoui, S. (2015), “Factors affecting performance of commercial banks in Albania”, The European Proceedings of Social and Behavioral Sciences, eISSN, pp. 2357-1330, doi: 10.15405/epsbs.2015.05.3.
  10. Demirguc-Kunt, A., Feyen, E. and Levine, R. (2011), Optimal Financial Structures and Development: The Evolving Importance of Banks and Markets, Policy Research Working Paper Series 5805, World Bank, Mimeo.
  11. Doumpos, M., Hasan, I. and Pasiouras, F. (2017), “Bank overall financial strength: Islamic versus conventional banks”, Economic Modelling, Vol. 64, pp. 513-523, doi: 10.1016/j.econmod.2017.03.026.
  12. Doumpos, M. and Zopounidis, C. (2012), “Efficiency and performance evaluation of European cooperative banks”, in Pasiouras, F. (Ed.), Efficiency and Productivity Growth: Modelling in the Financial Services Industry, Wiley, New York, pp. 237-252.
  13. Fayed, M.E. (2013), “Comparative performance study of conventional and Islamic banking in Egypt”, Journal of Applied Finance and Banking, Vol. 3 No. 2, p. 1.
  14. Fulford, S.L. (2015), “How important are banks for development? National banks in the United States”, Review of Economics and Statistics, Vol. 97 No. 5, pp. 921-938, doi: 10.1162/REST_a_00546.
  15. Gupta, N. and Mahakud, J. (2020), “Ownership, bank Size, capitalization and bank performance: evidence from India”, Cogent Economics and Finance, Vol. 8 No. 1, p. 1808282, doi: 10.1080/23322039.2020.1808282.
  16. Hanif, M., Tariq, M. and Tahir, A. (2012), “Comparative performance study of conventional and islamic banking in Pakistan”, International Research Journal of Finance and Economics, No. 83, pp. 1450-2887.
  17. Harahap, I.M. (2018), “Impact of bank performance on profitability”, Scholars Journal of Economics, Business and Management, Vol. 5 No. 8, pp. 727-733, doi: 10.21276/sjebm.2018.5.8.3.
  18. Hasanov, F.J., Bayramli, N. and Al-Musehel, N. (2018), “Bank-specific and macroeconomic determinants of bank profitability: evidence from an oil-dependent economy”, International Journal of Financial Studies, Vol. 6 No. 3, p. 78.
  19. Hunjak, T. and Jakovčević, D. (2001), “AHP based model for bank performance evaluation and rating”, Proceedings of 6th International Symposium on Analytic Hierarchy Process (ISAHP 2001), Berne, pp. 149-158.
  20. Ibrahim, M.H. (2020), “Islamic banking and bank performance in Malaysia: an empirical analysis”, Journal of Islamic Monetary Economics and Finance, Vol. 6 No. 3, pp. 487-502, doi: 10.21098/jimf.v6i3.1197.
  21. Islam, M.A., Siddiqui, M.H., Hossain, K.F. and Karim, L. (2014), “Performance evaluation of the banking sector in Bangladesh: a comparative analysis”, Business and Economic Research, Vol. 4 No. 1, p. 70, doi: 10.5296/ber.v4i1.4672.
  22. Islam, M.A., Sarker, M.N.I., Rahman, M., Sultana, A. and Prodhan, A. (2017), “Determinants of profitability of commercial banks in Bangladesh”, International Journal of Banking and Financial Law, Vol. 1 No. 1, pp. 1-11.
  23. Jaffar, M. and Manarvi, I. (2011), “Performance comparison of Islamic and conventional banks in Pakistan”, Global Journal of Management and Business Research, Vol. 11 No. 1, pp. 61-66.
  24. Karim, M.A., Hassan, M.K., Hassan, T. and Mohamad, S. (2014), “Capital adequacy and lending and deposit behaviors of conventional and Islamic banks”, Pacific-Basin Finance Journal, Vol. 28, pp. 58-75, doi: 10.1016/j.pacfin.2013.11.002.
  25. Kashif, M., Iftikhar, S.F. and Iftikhar, K. (2016), “Loan growth and bank solvency: evidence from the Pakistani banking sector”, Financial Innovation, Vol. 2 No. 1, pp. 1-13, doi: 10.1186/s40854-016-0043-8.
  26. Keelin, T.W. (1981), “A parametric representation of additive value functions”, Management Science, Vol. 27 No. 10, pp. 1200-1208.
  27. Khalil, F. and Siddiqui, D.A. (2019), “Comparative analysis of financial performance of Islamic and conventional banks: evidence from Pakistan”, SSRN Electronic Journal. doi: 10.2139/ssrn.3397473.
  28. Le, T.D. and Ngo, T. (2020), “The determinants of bank profitability: a cross-country analysis”, Central Bank Review, Vol. 20 No. 2, pp. 65-73.
  29. Lee, J.Y. and Kim, D. (2013), “Bank performance and its determinants in Korea”, Japan and the World Economy, Vol. 27, pp. 83-94.
  30. Mahmud, K., Mallik, A., Imtiaz, M.F. and Tabassum, N. (2016), “The bank-specific factors affecting the profitability of commercial banks in Bangladesh: a panel data analysis”, International Journal of Managerial Studies and Research, Vol. 4 No. 7, pp. 67-74, doi: 10.20431/2349-0349.0407008.
  31. Migliardo, C. and Forgione, A.F. (2018), “Ownership structure and bank performance in EU-15 countries”, Corporate Governance: The International Journal of Business in Society, Vol. 18 No. 3, pp. 509-530, doi: 10.1108/CG-06-2017-0112.
  32. Mohammed, H.K., Wetere, Y.M. and Bekelecha, M.S. (2015), “Soundness of Ethiopian banks”, International Journal of Finance and Banking Studies (2147-4486), Vol. 4 No. 2, pp. 29-37, doi: 10.20525/ijfbs.v4i2.218.
  33. Nguyen, A.H., Nguyen, H.T. and Pham, H.T. (2020), “Applying the CAMEL model to assess performance of commercial banks: empirical evidence from Vietnam”, Banks and Bank Systems, Vol. 15 No. 2, pp. 177-186, doi: 10.21511/bbs.15(2).2020.16.
  34. Nisar, S., Wang, S., Ahmed, J. and Peng, K. (2015), “Determinants of bank’s profitability in Pakistan: a latest panel data evidence”, International Journal of Economics, Commerce and Management, Vol. 3 No. 4, pp. 1-16.
  35. Pekkaya, M. and Demir, F.E. (2018), “Determining the priorities of CAMELS dimensions based on bank performance”, Global Approaches in Financial Economics, Banking, and Finance, Springer, pp. 445-463.
  36. Ping, K.G. and Kusairi, S. (2020), “Analysis of CAMEL components and commercial bank performance: panel data analysis”, Jurnal Organisasi Dan Manajemen, Vol. 16 No. 1, pp. 1-10, doi: 10.33830/jom.v16i1.835.2020.
  37. Rafiq, M.R.I. (2016), “Determining bank performance using CAMEL rating: a comparative study on selected Islamic and conventional banks in Bangladesh”, Asian Business Review, Vol. 6 No. 3, pp. 151-160, doi: 10.18034/abr.v6i3.40.
  38. Rahman, M.Z. and Islam, M.S. (2017), “Use of CAMEL rating framework: a comparative performance evaluation of selected Bangladeshi private commercial banks”, International Journal of Economics and Finance, Vol. 10 No. 1, p. 120.
  39. Robin, I., Salim, R. and Bloch, H. (2018), “Financial performance of commercial banks in the post-reform era: further evidence from Bangladesh”, Economic Analysis and Policy, Vol. 58, pp. 43-54, doi: 10.1016/j.eap.2018.01.001.
  40. Saha, N.K. and Bishwas, P.C. (2021), “Determinants of financial performance of commercial banks in Bangladesh: an empirical study on private commercial banks”, Global Journal of Management And Business Research, Vol. 21 No. 2, pp. 23-32.
  41. Saini, P. and Sindhu, J. (2014), “Role of commercial bank in the economic development of India”, International Journal of Engineering and Management Research (IJEMR), Vol. 4 No. 1, pp. 27-31.
  42. Srairi, S.A. (2010), “Cost and profit efficiency of conventional and Islamic banks in GCC countries”, Journal of Productivity Analysis, Vol. 34 No. 1, pp. 45-62.
  43. Staikouras, C.K. and Wood, G.E. (2004), “The determinants of European bank profitability”, International Business and Economics Research Journal (IBER), Vol. 3 No. 6, doi: 10.19030/iber.v3i6.3699.
  44. Sun, P.H., Mohamad, S. and Ariff, M. (2017), “Determinants driving bank performance: a comparison of two types of banks in the OIC”, Pacific-Basin Finance Journal, Vol. 42, pp. 193-203, doi: 10.1016/j.pacfin.2016.02.007.
  45. Tervonen, T. and Figueira, J.R. (2008), “A survey on stochastic multicriteria acceptability analysis methods”, Journal of Multi-Criteria Decision Analysis, Vol. 15 Nos 1-2, pp. 1-14.
  46. Todorović, V., Furtula, S. and Durkalić, D. (2018), “Measuring performance of the Serbian banking sector using CAMELS model”, Teme - Časopis za Društvene Nauke, Vol. 42 No. 3, pp. 961-977, doi: 10.22190/TEME1803961T.
  47. Uddin, G.S., Kyophilavong, P. and Sydee, N. (2012), “The casual nexus of banking sector development and poverty reduction”, International Journal of Economics and Financial Issues, Vol. 2 No. 3, pp. 304-311.
  48. Yesmine, S. and Bhuiyah, M.S.U. (2015), “Determinants of banks' financial performance: a comparative study between nationalized and local private commercial banks of Bangladesh”, International Journal of Business and Management Invention, Vol. 4 No. 9, pp. 33-39.

 

Related articles