This Research Paper is submitted to the Department of Finance, University of Rajshahi, in Partial Fulfillment of the Requirements for the Degree of Masters of Business Administration (MBA) Program-2016

1. 1
RESEARCH REPORT
ON
The Impact of Financial Risks on Profitability of Commercial Banks
of Bangladesh
[ This Research Paper is submitted to the Department of Finance, University of Rajshahi, in
Partial Fulfillment of the Requirements for the Degree of Masters of Business Administration
(MBA) Program-2016]
Prepared by,
Md. Jahangir Alam
ID : 12067622
Reg. : 1309
Session : 2011 – 2012
MBA
Dept. of Finance and Banking
Rajshahi University
Supervised by,
Dr. Md. Atiqur Rahman
Khan
(Associate Professor)
Department of Finance
Rajshahi University
Submission Date: 4th
October, 2017

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TABLE OF CONTENTS
LETTER and CHAPTERS
LETTER OF SUBMISSION
ACKNOLEDGEMENT
STUDENT’S DECLARATION
ACCEPTANCE LETTER
ABSTRACT
Chapter One: Introduction
1.1 Global Economy
1.2 Bangladesh Economy and Impact on Banking Industry
1.2.1 Bangladesh Banking Industry
1.2.2 Political Turmoil
1.2.3 Inflation and Monetary Policy (Impact on Banking Industry)
1.2.4 Credit growth scenario (Impact on Banking Industry)
1.3 Objectives of This Study
Chapter Two: Background of the Study and Literature Review
2.1 Background of Study
2.2 Literature Review
Summary Table (Literature Review)
Chapter Three: Data and Methodology
3.1 Hypothesis
3.2 Source of Data
3.3 Model
3.4 Dependent Variables
3.5 Independent Variables
Chapter Four: Findings
Chapter Five: Recommendations and Conclusion
5.1 Recommendation
5.2 Conclusion
5.3 Limitation of The Study
5.1 Reference
5.2 Appendix

3. 3
A Dedication
Bestowed to My Parents &
My Honorable Teachers

4. 4
LETTER OF SUBMISSION
04th October, 2017
Dr. Md. Atiqur Rahman Khan
Associate Professor
Department of Finance
University of Rajshahi
Subject: Submission of research report.
Dear Sir,
It is a great pleasure and privilege to present the research report on “The Impact of Financial
Risks on Profitability of Commercial Banks of Bangladesh”. This was assigned to me as a partial
requirement for the competition of Master of Business Administration (MBA) degree.
Throughout the study I have tried with the best of my capacity to accommodate as much
information and related issues as possible and tried to follow the instructions as you have
suggested. I have tried my level best to put in meticulous effort for the preparation of this
report within given time. Any sort of suggestions regarding this report would be gladly
appreciated and I would be gratified if this report serves its purposes. I believe that this
research program has enriched both my knowledge and experience.
Sincerely,
______________________________
Md. Jahangir Alam
MBA
ID: 12067622
Session: 2011-2012
Registration No: 1309
Department of Finance & Banking
University of Rajshahi.

5. 5
ACKNOLEDGEMENT
First of all, I would like to pay my special gratitude and thank to the God who has created the
universe and us. I believe without the help of the Almighty I would not be able to undertake
this research program.
Then I will give special thanks and cordial respect to my honorable favorite teacher and
supervisor Dr. Md. Atiqur Rahman Khan, Associate Professor, Department of Finance,
University of Rajshahi. I am really grateful to this great man for his supervision, cordial
assistance, and productive guidelines. Furthermore, he never shows any sort of bothering
attitude to us. Whenever I seek any kind of instructions, he tries his best to provide me. Once
again, I thank him for spending some of his valuable time with me.
I also like to thank the other reverent teachers of my department for their significant advice
and assistance.
Knowingly or unknowingly, I might have done some mistakes in my research report. As no
human being is out of mistake, I am cordially requesting you all to forgive me for my mistakes.
Once again thank you all.
Date: 04th October, 2017
Sincerely,
______________________________
Md. Jahangir Alam
MBA
ID: 12067622
Session: 2011-2012
Registration No: 1309
Department of Finance & Banking
University of Rajshahi.

6. 6
STUDENT’S DECLARATION
04th October, 2017
I hereby declare that this paper on “The Impact of Financial Risks on Profitability of
Commercial Banks of Bangladesh” has been prepared by me under the supervision of
honorable teacher Dr. Md. Atiqur Rahman Khan, Associate Professor, Department of Finance,
University of Rajshahi. I also would like confirm that the report is prepared exclusively for the
academic purpose and has not been submitted to anywhere for any other purpose.
Sincerely,
______________________________
Md. Jahangir Alam
MBA
ID: 12067622
Session: 2011-2012
Registration No: 1309
Department of Finance & Banking
University of Rajshahi.

7. 7
ACCEPTANCE LETTER
04th
October, 2017
This is to certify that Md. Jahangir Alam, a student of MBA, Year-2016, Department of Finance,
University of Rajshahi bearing Roll No. 12067622, has successfully completed research report
on “The Impact of Financial Risks on Profitability of Commercial Banks of Bangladesh”. He has
prepared this research report under my guidance. During the program he was found very
active, sincere and devoted to his assignment.
I wish him every success in his life.
Supervisor
____________________________
Dr. Md. Atiqur Rahman Khan
(Associate Professor)
Department of Finance
University of Rajshahi

8. 8
ABSTRACT
The paper examines the relationship between financial risks on profitability of few
conventional and Islamic banks in Bangladesh for the period between 2011 and 2015
aggregately. The measures of profitability that have been used as dependent variable in the
study are the return on equity (ROE) and return on assets (ROA) while the financial risks are
credit risk, interest rate risk and liquidity risks (independent Variables). This study employs
panel data regression, Unit Root test, Descriptive Statistics and Correlation Matrix of the
variables. It was found that in case of ROE, the OBR, IRR, CRR_IRR and CAP have significant
impact in profitability at 5% significant level. As well as at 10% level of significance CRR is
significant and credit risk has a significant impact on ROA and ROE for the banks. And next, the
Interbank Ratio also have parallel significance to both banks. The effect of IRR and both ROA as
well ROE also have been found significant for both banks. Liquidity risk was found to have an
insignificant impact on both profitability measures and the t ratio is positive but it should have
had negative relation. As the economic and banking industry of Bangladesh are volatile than
those of first world countries, banks of Bangladesh should have had quite positive liquidity in
the banks its own as call money rate also high in interbank as well.
Many other researches already have been conducted on this criterion but all of them
researched on comparison of Islamic and Conventional banks but this paper evaluates the both
banks financial risk on profitability and their impacts on the banking industry and the country’s
economy. The data are taken from the balance sheets of the respective banks and calculated
the independent variable wisely so as to get through a sophisticated analysis and that has been
done through EViews to get those result.
Over all the paper will portrait the picture of the profitability dependency on the basis of
the financial risks and let the respective authority and further researcher to get a deep horizon
knowledge.

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Chapter one: Introduction
1.1 Global Economy
In the recent years the global economy continued to demonstrate weakness
particularly in the Eurozone and the emerging market economies on which so much of
future growth was projected post financial crisis of 2007-08. The US economy, the
largest single-country importer of Bangladesh garments, continued to be an exception,
showing moderate growth in output and job creation. Global growth for 2015 is
projected at a modest 3.1 per cent, 0.3 percentage point lower than in 2014, as per the
IMF updates of October 2015. Trade growth is expected to be 4.1% in 2016 whereas it
was 3.2%in 2015. What is new is that in the years prior to the financial crisis, global
trade growth typically outpaced output growth.
Growth in advanced economies is projected to increase modestly in the current
and following fiscal years. This year's developments reflect mainly a modest recovery in
the Euro area and a return to positive growth in Japan, supported by falling oil prices,
accommodative monetary policy, and, in some cases, currency depreciation in emerging
markets. However, the global growth outlook is generally weakening, with growth
projected to decline for the fifth year in a row. This reflects a combination of factors:
weakness in commodity prices, as well as geopolitical tensions and domestic strife in a
number of countries. In particular, emerging markets remain vulnerable in the short
term to further declines in commodity prices and sharp appreciation of the U.S. dollar,
which could further strain corporate balance sheets in some countries.

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1.2 Bangladesh Economy and Impact on Banking Industry
1.2.1 Bangladesh Banking Industry
Bangladesh is an emerging developing country in the south Asia. The banking
sectors are contributing to her economy a lot. Bangladesh Bank is the central bank of
Bangladesh and chief regulatory authority of banking sector. Along with Bangladesh
Bank, the banking sector of Bangladesh is consisted of several types of institutions.
These institutions are listed below in table 1.1.
TABLE: 1.1
SL Bank 29 NCC Bank Ltd.
State Owned Commercial Banks 30 NRB Bank Ltd.
1 Agrani Bank 31 NRB Commercial Bank Ltd.
2 Janata Bank 32 NRB Global Bank Ltd.
3 Rupali Bank 33 One Bank Ltd.
4 Sonali Bank 34 Premier Bank Ltd.
5 BASIC Bank 35 Prime Bank Ltd.
6 BDBL 36 Pubali Bank Ltd.
Specialized Banks 37 Sahjalal Islami Bank Ltd.
7 Bangladesh Krishi Bank 38 Social Islami Bank Ltd.
8 RAKUB. 39 SBAC Bank Ltd.
Private Commercial Banks 40 Southeast Bank Ltd.
9 AB Bank Ltd. 41 Standard Bank Ltd.
10 Al-Arafah Islami Bank Ltd. 42 The City Bank Ltd.
11 Bangladesh Commerce Bank Ltd. 43 The Farmers Bank Ltd.
12 Bank Asia Ltd. 44 Trust Bank Ltd.
13 BRAC Bank Ltd. 45 Union Bank Ltd.
14 Dhaka Bank Ltd. 46 United Commercial Bank Ltd.
15 Dutch Bangla Bank Ltd. 47 Uttara Bank Ltd.
16 Eastern Bank Ltd. Foreign Commercial Banks
17 EXIM Bank Ltd. 48 Bank Al-Falah
18 First Security Islami Bank Ltd. 49 CITI Bank NA
19 ICB Islamic Bank 50 Commercial Bank of Ceylon
20 IFIC Bank Ltd. 51 Habib Bank Ltd.
21 Islami Bank Bangladesh Ltd. 52 HSBC
22 Jamuna Bank Ltd. 53 National Bank of Pakistan
23 Meghna Bank Ltd. 54 Standard Chartered Bank
24 Mercantile Bank Ltd. 55 State Bank of India
25 Midland Bank Ltd. 56 Woori Bank Ltd.
26 Modhumoti Bank Ltd
27 Mutual Trust Bank Ltd.
28 National Bank Ltd.

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After several years of surpluses over the past decade, Bangladesh's current account
balance turned to a deficit of $1.65 billion in FY15 from a surplus of $1.4 billion in FY14,
owing to poor growth in exports of 3% overshadowed by a modest growth of 11% in
imports. Other components of the current account have not fared well either, with
increasing deficits in the services and income account, except for remittances. There is
no cause for alarm about a negative balance in the current account as it is fitting for a
developing country like Bangladesh to run substantial trade deficits as imports of capital
machinery and intermediate inputs support investment and productive activity. As long
as the current account deficit stays within 1% of GDP, its financing is quite manageable.
During July-August, FY15, a modest recovery from the deficit was witnessed when
despite a deficit in overall trade balance, services and primary income, inflow of wage
earners remittances contributed to a current account surplus of $800million.
1.2.2 Political Turmoil
Violent disruptions in economic activity in the first quarter of 2015 might have
given the impression that Bangladesh may experience challenges in achieving its
economic growth targets. However, the economy appears to have picked up speed and
remained steady for the better part of 2015 giving hope that economic progress has
resumed. Bangladesh has maintained a stable GDP growth of 6%+ over the past decade,
no mean achievement for a country facing steep challenges on many fronts. Provisional
estimates of GDP for FY 2015 stands at a remarkable 6.51 % compared to 6.06% in FY14.
Based on estimates of gross domestic product at current prices, Bangladesh is currently
the world's 44th largest economy, climbing up 11 notches from the previous year, due
to consistent growth over the years, according to the IMF and the WB.
1.2.3 Inflation and Monetary Policy (Impact on Banking Industry)
At the close of 2011 Bangladesh inflation had reached an all-time high of 11%
plus, making it the highest among the South Asian Countries. Thanks to the adoption of

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an appropriate monetary policy by Bangladesh Bank, inflation rate was brought down to
a more desirable level over a span of three years. The shift in monetary policy till date
remains a successful measure in cutting down inflation in Bangladesh. The downward
trajectory of inflation in recent times can be attributed to favorable agricultural
production, decrease in international commodity prices and minimum supply
disruptions due to absence of natural or man-made calamities. The continuous
improvement in domestic distribution system has further minimized supply disruptions
contributing to containment of inflation. It is also important to note that the first half of
FY16 has been blessed with minimum political turmoil making it easier for inflation to
reach its targeted level within the desired period of time. The upsurge in point to point
food inflation observed in early 2015 could be attributed to supply disruption caused by
political unrest and road blockades throughout the country during that period. High
food inflation persisted for the following few months before changing course
downwards. In Sept- 2015, the point to point food inflation declined to 5.92% from a
high of 7.63% recorded in the same month of the previous year. Following the
decreasing trend in food inflation, the average general inflation settled at 6.24% in Sept-
2015, being consistent with the inflation target of 6.2% for FY16. In contrast to the
average general and food inflation, the average core inflation that counts for nonfood
and non-fuel inflation has inched up from 5.64% in Jan-2015 to 6.22% in September. In
the latest Monetary Policy Statement (MPS), Bangladesh Bank has promised a "cautious
stance" in order to address the continuous upsurge in core inflation. If the government
allowed the local price of fuel oil to adjust in line with global market rates, then perhaps
the inflation target for FY16 could have been reached by the end of 2015. Although
there is scope for inflation to decline further, Bangladesh Bank expects an escalation in
the future if the economy targets a growth rate of 7% or above. It is extremely
important that Bangladesh moves out of the belief that higher inflation is required for
higher growth. Higher inflation in a growing economy would soon affect the lending rate

13. 13
of banks and result in a case of perverse taxation leading to social inequality. The
country's competitiveness will also be harmed as rising inflation will result in an
appreciation of the real exchange rate. According to the latest MPS, "affording an
inflation rate of 7% or 8% will be necessary to absorb the speeding up of employment,
output, and wages". Against this backdrop, countries like India and China should be
taken as good examples of economies which have defied this concept by undertaking
strong inflation controls. Bangladesh too should follow their footsteps and reduce
tolerance for higher inflation in the future.
1.2.4 Credit growth scenario (Impact on Banking Industry)
Domestic credit in Bangladesh has always been dominated by private sector
credit claims. According to MPS 2015, the government is expected to borrow more
money from the banking system in the ongoing fiscal year. However, when it comes to
actual financing needs of the government, some discrepancies are always observed
between the projected and the real growth of public credit. In FY15, public credit
registered a negative growth of 2.6% whereas the original projection by Bangladesh
Bank was a positive 23.7%. The fall in public sector credit growth in the beginning of the
year can be attributed to the slow implementation of government projects due to
political unrest. Such volatility in the credit growth figures must soon be addressed by
the Bangladesh Bank in order to have a more accurate and viable projection in the
future. In contrast, private sector credit growth has been relatively stable over the last
few years. An exception would be the drastic fall witnessed in FY13, when private credit
growth reduced to 10.8% from a high of 19.7%. The growth rate has been slower since
then. Part of this fall could be attributed to the limited interest in borrowing for new
investments within the business community. From Dec-14 onwards, the growth rate has
been stubbornly hovering around 13%. In addition, lack of electricity and gas supply, the
major barriers to investment, are still prevailing, making businessmen reluctant to

14. 14
expand their businesses. This has added to the plummeting demand for private credit.
Likewise, the sluggish growth of RMG exports in FY15, a possible effect of Rana Plaza
episode. According to the latest MPS, private sector credit growth of 13.2% in June-15,
was adequate to support the output growth of 6.5%. Against this backdrop, a private
sector credit growth of 15% should be sufficient to maintain the desired output growth
of 7% for the current fiscal year (highlighted in MPS 2015). However, if the slow pace of
credit growth persists then the prospect of reaching the projected credit growth by the
end of FY16 may not materialize. It is therefore, important that Bangladesh Bank takes
appropriate measures to create room for private sector credit expansion in order to
help the economy sustain the desired level of output growth.
In the end I express my sincerest gratitude to all the regulatory bodies specially
Bangladesh Bank for their support. We hope with successful launching of Rights Issue
the banks will be able to overcome many of the negative aspects of business. Let’s all
hope for a better 2016.
1.3 Objectives of the Study
The objectives of this study is on to portray the relationship and the extent to
which financial risks affect both the conventional and Islamic banks’ profitability – a
combined scenario. This paper will examine whether dependent variables – ROA and
ROE has been signified by the examined independent variables -, mainly, IRR, CRR and
LQR (sub hypothesis).

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Chapter Two: Background of the Study and Literature Review
2.1 Background of Study:
Banks profitability is the ultimate test of the effectiveness of risk management. It
is the bottom-line of any financial institutions and thus “Superior risk management
practices are really good for the bottom line” [Bird and Skinner-2005]. Therefore,
knowing the impact that the financial risks have on the profitability of the bank is an
important agenda for all financial institutions as it would enable the bank to manage
those risks effectively. Moreover, a strong and profitable banking system promotes
broader financial viability and increases the economy’s resilience to adverse
macroeconomic (both environmental) changes. The tradeoff between risk and return is
well acknowledged that the higher return exposes with higher risk. Therefore, in order
to increase the return, banks should know which risk factors have greater effect on
profitability. Moreover, it is also a well-known fact that the amount of risk faced by
banks is of substantial nature and is of great concern to the policymakers. We have
examined four Islamic and Five conventional commercial banks in this research paper.
Islamic banking is a banking system where financial resources are mobilized and
invested in accordance with principles of Islamic Shari'ah. Islamic finance is strictly
equity-based and asset-backed. There are various concepts which underlie the functions
of Islamic banking section and sets it aloof from conventional banking section in banking
industry. The first and most important principle is that the charging and the receiving of
interest (called Riba) is strictly prohibited in Islam. However, there have been some
doubts expressed by Islamic economic scholars as to whether the interest rates charged
by modern financial institutions are equivalent to the Shari'ah concept of Riba. Another
principle includes the sharing of profits and losses of an investment by both
fund-providers and investors based on their capital share and effort. In contrast to

16. 16
conventional finance, there is no guaranteed rate of return. Finally, investors should be
fully aware and conscious of the business to be invested in, its policies, the products it
produces, the services it provides, and the impact that these have on society and the
environment. One must work for profits, and simply lending money to someone who
needs it does not count as work. Today’s modern banks are not only providing
traditional banking but also expanding the many financial services and acting in like
shadow company. In today’s modern world the life of the people directly or indirectly
are connected with the arena of banking whether conventional or Islamic banking.
Although Islamic banking is not a newer concept in Bangladesh as it has started its
operation since 1983, only few people are aware about its operation. But things and
environment are changing. Islamic Banking is also getting popularity in the country. In
this research we have tried to show the Impact of financial Risks on profitability of
Commercial Banks of Bangladesh (Conventional Banking and Islamic Banking in
Bangladesh).
2.2 Literature Review
Numerous studies on bank performance and the determinants of profitability
have been conducted in various countries around the world. The studies are either
single country studies or many countries studies. These studies look at the internal and
external factors that affect the conventional banks’ performance. They form the basis
for the development of the models of the current study on the impact of risks on
profitability. Although extensive empirical studies have been conducted to determine
the factors that affect the performance and profitability of conventional banks, quite a
number of similar studies have also been carried out on Islamic banks.
Sarker and Saha (2011) concluded that the all types of commercial banks in
Bangladesh show a greater fluctuation in profitability & productivity during 2000-2009.
Although they had increasing trend of the same during 2000-2009 but the average

17. 17
profitability of the banks deteriorated during 2002-2005 compared to that due to
absence of interest on classified advances. The banks reveal that the major reason for
the reduction of profits of the banks is due to the introduction of financial sector reform
prescribed by Bangladesh Bank. If such system would have prevailed, there was little
scope to show increasing profits in each of the banks, excepting this there were
differences in cost of fund, profitability, productivity etc. among the banks. The major
causes of decline in profit are high cost of fund, increasing idle fund, lack of opportunity
for profitable investment of available fund, unorganized security market, more
dependence on non-interest income, lack of good entrepreneurs and rapid industrial
sickness etc. Two hypotheses are tested based on said objectives. This study covers
operational information of four NCBs, PCBs, SCBs & FCBs among the 4 NCBs, 26 PCBs, 9
FCBs & 4 SCBs based on secondary data collected from Government & nongovernment
publications for a period of 10 years i.e. 2000-2009. The findings of the study reveal the
wide fluctuation in interest rates, recovery rates, stuck-up advances, cost of fund,
profitability, productivity, earning rates etc. They have conducted their study on
Bangladesh and to get the result as much as viable, they have applied several
techniques and methods - Techniques of Analysis: They have used these for analysis and
interpretation of the available data of the banks like Mean, SD, CV, AGR, AAGR, EGR,
TREND, BUSINESS FORECASTING, Maximum level, & Minimum level, Regression,
ANOVA, Smoothing Exponential Growth Forecasting Methods & Factor analysis etc.
Forecasting: Forecasting refers to an important model of predicting values of a single
time series for periods outside the sample – referred by Shaha. It can be done either by
employing the facilities for fitting and projecting specific methods (models), or by
employing the unified forecasting facility. Factor Analysis is a general name denoting a
class of procedures primarily used for data reduction and summarization. In marketing
research, there may be a large number of variables, most of which are correlated and
which must be reduced to a manageable level. Relationships among sets of many

18. 18
interrelated variables are examined and represented in terms of a few underlying
factors.
Paul and Bhowmik et al. (2013) found that conventional banks are more
profitable and are significantly different from Islamic bank in Return on Assets (ROA),
Return on Equity (ROE). Their aim of that study was to examine and evaluate the
profitability and liquidity of a group of 5 Conventional banks in Bangladesh with a group
of 5 Bangladeshi Islamic banks. The study evaluates the profitability and liquidity of two
types of banking system in Bangladesh for the period of 2008 to 2012. Different financial
ratios i.e. Return on Asset (ROA), Return on Equity (ROE), Profit Expense Ratio (PER), Net
Profit Margin (NPM), Earnings per Share (EPS), Profit per branch, Profit per employee
have been used for evaluating profitability and Loan to Deposit ratio (LDR), Loan to
Assets ratio (LAR) are used for evaluating liquidity of these 2 categories banks. T-test
and F-test have been used in determining the significance of the differential
performance of the two groups of bank. The study found that Islamic Banks are less
preferable than Conventional banks in the year 2008 and 2009 in all the profitability
indicators. In 2010, Conventional banks had been more profitable than Islamic banks
except ROE, PER. In 2011 and 2012, Islamic banks’ profitability performance is better
than that of Conventional banks in the performance indicators except EPS, Profit per
Branch and Profit per Employee. However, there is no significant difference in liquidity
between the two sets of banks. LAR had been constantly higher in Islamic banks in all
the years though LDR had not been higher during the same period. In 2010 and 2011,
Conventional Banks’ LDR is higher than the Islamic Bank. The reasons are that
conventional banks in Bangladesh have longer history and experience in doing banking
business and hold dominating position in the financial sector with its large share in the
overall financial assets of Bangladesh as compared to Islamic banks, which in true sense,
started only a few years back with all letter and spirit. The study also found that Islamic

19. 19
Banks are less profitable having less liquidity position during 2008-2012. However, it had
improved considerably in its profitability during 2011 and 2012.
Uddin (2014) observed that The deposits and investment of the Islamic banking
systems are now 25 percent & 30 percent respectively of all private banks deposits and
investments. They have tested different activities of the Islamic banks & Square of
correlation coefficient (r2) has also been tested for all trend equations. It is observed
that all Islamic banks are able to achieve a stable growth & Square of correlation
coefficient (r2) is positive, in many cases above 0.90. It indicates the prospect of Islamic
banks in Bangladesh is very bright. The study recommended stakeholders to rely on
Islamic Banks for making economic decision as well as recommended Banks to increase
the level of compliance with Shariah and state policy to increase their performance. He
had recommended that Islamic banks should increase the employment opportunities for
the betterment of welfare of the society. Islamic Banks should establish available
branches all over the country in appropriate location. Islamic banks should finance to
high-return projects & profitable use of surplus funds. Need to increase concentration
to capital market investment & inter-bank money market. He has taken six Islamic banks
listed in the stock exchanges in Bangladesh. All the six listed Islamic banking companies
were taken as the sample for the study, that is, the sample covered 100% population of
the field. He has measured the fiscal year from 2008 to 2012 has been selected to
analyze the financial statements in the annual report of the banks. And then leven trend
equations have been tested for different activities of the Islamic banks & Square of
correlation coefficient (r2) has also been tested for all trend equations as well as growth
percentage is also used in this analysis. Among the various straight line Trend Methods
of Time Series Analysis, the method of Least Square is most popular and widely used in
practice. The method of least square can be used either to fit a straight-line trend or a
parabolic trend. His paper measures the performance based on financial statements
from 2008 to 2012 of 6 listed Islamic banks in Bangladesh Under 11 financial criteria i.e.

20. 20
Growth of Branches, Employees, Deposits, Net Income after tax, EPS, ROA, Net asset
value per share, number of shareholders, Price earnings ratios, Capital adequacy ratios
(CAR), Return on equity (ROE) ratios. At last he observed that the net income of the
Islamic banks has increased from the previous year during 2008 to 2012. Square of
correlation coefficient (r2) of net income of all the selected banks are high i.e. more
than 0.70 except Export Import Bank and Shahjalal Islami bank and It is observed the
deposit is highest in IBBL that is TK 417,844.14 in 2012. The growth percentage of First
security Islami Bank(FSIBL)is highest Al-Arafah Islami Bank(AIBL) is in second position.
The lowest growth percentage of deposit is in Shahjalal Islami bank Ltd. Trend equation
of all the selected banks are positive and goodness of fit of all the equations are very
high i.e. more than 0.90.
Rana et al found (2016) that Islamic banks in Bangladesh have better financial
performance than their Conventional counterparts. Profitability measures of
performance of ROA, ROE and PEM do not show (statistically) significant difference
between the performances of Islamic and Conventional banks and reject the hypothesis
that Islamic banks are more profitable than Conventional banks. Their study was to
analyses the performance of Islamic banks versus conventional banks in Bangladesh
over the period of 2013-2014. The objectives of this research work is to compares the
profitability and liquidity of Islamic banks to conventional banks in Bangladesh. The
study includes as profitability ratios: Return on average assets (ROAA), Return on
average equity (ROAE), and Profit expense ratio (PEM). Also includes as liquidity ratios:
Current Ratio (CR), Current Asset Ratio (CAR), Loan Deposit Ratio (LDR) and Net Loan/
Total Asset Ratio (NLTA). The results of the study indicate that Islamic banks in
Bangladesh have better financial performance than Conventional banks. Performance of
interest-free Islamic banks in business development, profitability, liquidity and solvency
is superior to that of interest-based conventional bank. That is comparatively Islamic

21. 21
banks are superior in financial performance to that of interest-based conventional
banks.
Abedin (2016) found that the principles of risk-sharing and the strong link of
credit to collateral means that Islamic banking is compatible with the financing of
cottage industries and start-ups, and can contribute to more inclusive growth. Other
reasons include the superior performance of Islamic banks over conventional banks as
revealed by profitability, liquidity and capital adequacy indicators. As he studied on the
performance and prospect of Islamic bank in Bangladesh, he also showed some
statistical results - although the Islamic banking industry has been growing at a faster
rate than the conventional banks, Shari'ah compliant banks still make up a smaller share
(approximately one-fifth) of the total banking sector. During the third quarter of 2015,
the share of total deposits and total investments of Islamic banks accounted for 21.9%
and 17.5% respectively among overall banking sector. Out of all the Islamic banks, Islami
Bank Bangladesh Limited (IBBL) accounted for the biggest share of deposits (38.7%)
followed by First Security Islami Bank Ltd. (13.6%) and Exim Bank Ltd. (13.4%). The key
profitability indicators -- Return on Assets (ROA) and Return on Equity (ROE) -- reveal
that Islamic banks' profitability was higher. The ROA of 0.8%indicates an efficient use of
assets whereas ROE of 11.50% indicated higher earnings in comparison to their equity
position by the Shari'ah-compliant banks compared to profitability ratios of
conventional banks in 2014. Islamic banks have enjoyed a lower non-performing loan
(NPL) ratio - a measure of asset quality in the loan portfolio-of 4.90% compared to
9.70% NPL ratio over other banks in 2014. Since Islamic banks historically contain fewer
problem loans (except for one bank), they could gain more robust net profit, despite
their relatively higher provisioning in 2014 than in 2013. A total of seven out of eight
Islamic banks have been able to achieve the requirement of a minimum Capital
Adequacy Ratio (CAR) of 10 per cent in 2014. Islamic banks maintain liquidity levels
much above their Cash Reserve Ratio (CRR) and Statutory Liquidity Requirement (SLR)

22. 22
requirements of 6.5% and 5.5% respectively. Limited sources of Shari'ah-compliant
funds allow Islamic banks to borrow funds either from the Islamic inter-bank money
market, which came into existence in 2012, or from the Islamic Investment Bonds Fund
issued by the government.
Summary Table (Literature Review)
No. Title Country
and Year
Name of
Authors
Findings
1
Enterprise risk
management not
for you? Wrong
American Banker
America
(2005)
Bird and
Skinner
Superior risk management practices
are really good for the bottom line.
2
Performance
Indicators of
Banking Sector in
Bangladesh: A
Comparative Study
Bangladesh
(2011)
Sarker and
Saha
The banks reveal that the major
reason for the reduction of profits of
the banks is due to the introduction
of financial sector reform prescribed
by Bangladesh Bank.
3
Profitability and
Liquidity of
Conventional
Banking and Islamic
Banking in
Bangladesh: A
Comparative Study
Bangladesh
(2013)
Paul and
Bhowmik et
al.
They found that conventional banks
are more profitable and are
significantly different from Islamic
bank in Return on Assets (ROA),
Return on Equity (ROE).
4
Measuring the
Performance of
Islamic Banks in
Bangladesh: An
Exploratory Study
Bangladesh
(2014)
Md. Helal
Uddin
The study recommended
stakeholders to rely on Islamic Banks
for making economic decision as well
as recommended Banks to increase
the level of compliance with Shariah
and state policy to increase their
performance. He had recommended
that Islamic banks should increase
the employment opportunities for
the betterment of welfare of the
society.
5

23. 23
Profitability and
liquidity of
conventional
banking and Islamic
banking in
Bangladesh: A
comparative study
Bangladesh
(2016)
Rana, et al The empirical findings document a
negative link between the capital
ratio and the profitability, which
supports the notion that banks are
operating over-cautiously and
ignoring potentially profitable trading
opportunities.
6
Performance and
prospects of Islamic
banking in BD
Bangladesh
(2016)
Abedin He found that the principles of
risk-sharing and the strong link of
credit to collateral means that Islamic
banking is compatible with the
financing of cottage industries and
start-ups, and can contribute to more
inclusive growth.
7
Commercial Bank
Financial
Management: In
the
Financial-Services
Industry.
New Jersey
(2002)
Sinkey, J. F.,
Jr.,
The bank performance can be
decomposed into two major
elements of risk and return whereby
the return on equity (ROE) is on the
return side while the risk or ROE
variability are on the risk side. The
decomposition of return on equity
and its variability are the key
elements as they provide insights
regarding bank risks and returns.
8
Commercial bank
net interest
margins, default
risk, interest rate
risk, and of-balance
sheet banking.
UK (1997) Angbazo, L. Size of the bank is being measured
using year end natural log of total
assets.
Off balance sheet activities can be
categorized into lending (or
credit-related) products such as loan
commitments and letters of credit,
derivative (or risk management)
products such as futures, options and
swaps.
9
Islamic financing
and bank risks: the
case of Malaysia.
Malaysia
(2005)
Melina and
Verhoeven
The proxy for interest rate risk is the
maturity gap which is measured by
the ratio of the difference between
the dollar value of liabilities subject
to repricing within one year and the

24. 24
dollar value of assets subject to
repricing within the same time period
to total capital.
10
The determinants
of bank interest
margins: theory and
empirical evidence.
US (1981) Saunders, et
al.
They used this variable is represented
by the bank’s ratio of equity to total
assets. Well capitalized banks have
higher net interest margins and are
more profitable.
11
Bank-specific,
industry-specific
and
macroeconomic
determinants of
bank profitability.
Kuwait
(2005)
Athanasoglou
et al.
They included the profit persistence
in banking in his model. This is due to
the fact that some specific reasons
may cause the bank profitability not
to adjust quickly enough to its normal
level competitive profits, when an
exogenous shock occurs. In this study
the persistence is accounted for by
including the one period lagged
profitability measure among the
explanatory variables.
12
Capital structure
and performance of
Islamic banks and
ibs commercial
banks in Malaysia.
Malaysia
(2006)
Fathiyah The macroeconomics variable
(MACRO) that is used to control for
the effect of the economic
environment on banks’ profitability is
growth. This is measured by the GDP
growth; and it is expected to have a
positive impact on the profitability
according to well documented
literature on the association between
economic growth and financial sector
performance.
13
Basic Econometrics
(Fourth Edition).
US (2003) A normally distributed data is an
efficient, unbiased and consistent
estimator. A normally distributed
data is reflected in its descriptive
statistics. Table III summarizes the
mean and standard deviations of the
dependent and independent
variables used in the study for all the
commercial and Islamic banks.

25. 25

26. 26
Chapter Three: Data and Methodology
3.1 Hypothesis
Many people have mistakenly believed that risk management inherently reduces
the profitability of the banks. However, Giarla (1996) rebutted the argument that risk
management reduces profitability of the bank. His case study on Harrington bank shows
that controlling the interest rate risk and credit risk through on and off-balance sheet
hedges such as the interest rate swap and options stabilizes the Harrington’s bank
income and net worth. In this research the focus is on the relationship and the extent to
which financial risks affect bank profitability and, in particular, whether that impact
differs across banks. Thus, the hypotheses are:
H0 = Financial Risk does not have impact on Profitability of Banks.
H1 = Financial Risk has impact on Profitability of Banks.
Sub Hypothesis
H1a = Credit risk has an impact on the profitability of the banks.
H1b = Interest rate risk has an impact on the profitability of the banks.
H1c = Liquidity risk has an impact on the profitability of the banks.
3.2 Source of Data:
This study will cover the period of 2011-2015 of four Islamic and five
conventional commercial banks. Data required for the study are taken from the stated

27. 27
commercial banks websites. With those data and time period, we have conducted unit
root test of the variables and regressions to estimate the continuing recent situation.
3.3 Model:
ROEit = β0 + β1CRRit + β2LIQit + β3OBSit + β4IRRit + β1SIZit + β1CAPit + β1GDPit + μit
ROAit = β0 + β1CRRit + β2LIQit + β3OBSit + β4IRRit + β1SIZit + β1CAPit + β1GDPit + μit
Explanation of Variables
ROAit = Return on Assets of bank i for year t
ROEit = Return on Equity of bank i for year t
CRRit = Credit Risk of bank i for year t
IRRit = Interest Rate Risk of bank i for year t
LIQit = Liquidity risk of bank i for year t
OBSit = Off Balance Sheet Activities (credit related
activities) of bank i for year t
SIZEit = Log of Total Assets of bank i for year t
CAPit = Bank Capitalization of bank i for year t
GDPt = GDP Growth Rate for year t
βi = Coefficients of the variables
μit = Error term Hypothesis:

28. 28
3.4 Dependent Variables:
The dependent variable in this study is profitability. Theoretically the measures of
profitability are Return on Equity (ROE) and Return on Assets (ROA). ROE is measured
taking the ratio of Net Profit After Tax to Total Liabilities and ROE is ratio of NPAT to
Equity Capital. A risk return framework conceptualizes the overall bank performance.
The bank performance can be decomposed into two major elements of risk and return
whereby the return on equity (ROE) is on the return side while the risk or ROE variability
are on the risk side. The decomposition of return on equity and its variability are the key
elements as they provide insights regarding bank risks and returns [Sinkey-2002]. Banks
with lower leverage (higher equity) will generally report higher ROA but lower ROE.
Therefore, an analysis of ROE not only disregards the greater risks associated with high
leverage, but also since EM is often determined by the regulation; ROA emerges as the
key ratio for the evaluation of bank profitability.
3.5 Independent Variables:
The independent variables namely liquidity risk, credit risk and interest rate risk
and off-balance sheet activities have been selected on the basis of their potential
relevancy to this model and also because of their importance in depicting a bank’s real
financial position.
Liquidity risk: The proxy for liquidity risk that is used in this study is the ratio of
liquid assets to total liabilities, which is also the proxy that is usually used by other
studies [Angbazo-1997]. It shows a bank liquid asset as a percentage of its liabilities. As
liquidity risk is the risk of not having sufficient cash or borrowing capacity to meet
deposit withdrawals or new loan demand, the banks are forced to borrow emergency
funds at excessive cost. Therefore, as the proportion of funds invested in cash or cash
equivalents increases, a bank’s liquidity risk declines. This leads to the prediction that

29. 29
the higher the ratio, the lower the liquidity risk, other things being equal. Therefore, the
expected relationship with profitability is negative.
Credit Risk: A proxy for credit risk that will be used is the proportion of allowance
for loan loss to total asset [Angbazo-1997]. whereby provisions are liability accounts
formed as reserved potential on actual losses emanating from bad or substandard loan.
Credit risk is chosen because among the different banking risks, credit risk has a
potential social impact because of the number and diversity of stakeholders affected.
This is due to the fact that business failures and bankruptcies not only affect the banks
as lenders, but also shareholders, managers, suppliers, clients, financial community,
government, competitors and regulatory bodies among others. Theory suggests that
increased exposure to credit risk is normally associated with decreased firm profitability.
Hence, we expect a negative relationship between profitability and loan loss provision
ratio.
Interest rate risk (IRR): The proxy for interest rate risk is the maturity gap which is
measured by the ratio of the difference between the dollar value of liabilities subject to
repricing within one year and the dollar value of assets subject to repricing within the
same time period to total capital [Melina and Verhoeven-2005].
Gap = Rate Sensitive Assets – Rate Sensitive Liabilities
Thus: Interest Rate Risk = (Rate Sensitive Assets - Rate Sensitive Liabilities) / Total
Capital
Credit risk and Interest Rate risk: We examined the interaction between interest
rate risk and credit risk. This study extends the model and [Angbazo-1997] which
investigated the interaction between interest rate risk and credit risk. The credit risk and
interest rate risk have co-founding effect on each other. We expect it to have a positive
relationship with profitability.

30. 30
Off Balance Sheet: Off balance sheet activities can be categorized into lending (or
credit-related) products such as loan commitments and letters of credit, derivative (or
risk management) products such as futures, options and swaps [Angbazo-1997]. The
off-balance sheet activities are represented by the ratio of OBS to total assets.
Bank size: Size of the bank is being measured using year end natural log of total
assets [Angbazo-1997]. When loan demand increases, smaller banks may have the
tendency to lend more aggressively compared to larger banks by taking on riskier
projects with the anticipation of higher returns. This would mean that the banks would
be more exposed to credit risk.
Bank capital: As used by [Ho and Saunders-1981] this variable is represented by
the bank’s ratio of equity to total assets. Well capitalized banks have higher net interest
margins and are more profitable. Banks with higher capital ratios tend to face lower cost
of funding as they need to borrow less. Thus, we can say that they are less exposed to
liquidity risk, so the higher the ratio the lower the liquidity risk exposure of the banks.
Bank capital is thus expected to have a positive relationship with profitability.
Lagged ROA or ROE: Ref. [Athanasoglou et al.-2005] included the profit
persistence in banking in his model. This is due to the fact that some specific reasons
may cause the bank profitability not to adjust quickly enough to its normal level
competitive profits, when an exogenous shock occurs [Athanasoglou et al.-2005]. In this
study the persistence is accounted for by including the one period lagged profitability
measure among the explanatory variables.
GDP Growth: The macroeconomics variable (MACRO) that is used to control for
the effect of the economic environment on banks’ profitability is growth. This is
measured by the GDP growth [Fathiyah-2006]; and it is expected to have a positive
impact on the profitability according to well documented literature on the association
between economic growth and financial sector performance.

31. 31
Chapter Four: Findings
This section provides empirical evidence on the relationship between financial
risks and profitability of the conventional and Islamic banks of Bangladesh (Commercial).
Many research already has been conducted either the comparison between Islamic and
conventional commercial banks or individually either of them and we have conducted
the research keeping both of them parallel to estimate financial risk on profitability on
average. Panel unit root test was then performed to check for stationarity of the data
which was then followed by the regression models. Two regression models have been
conducted - ROA and ROE in respect of independent variables and also normality test
performed whether the data are normally distributed.
4.1 Findings
4.1.1 Descriptive Analysis
A normally distributed data is an efficient, unbiased and consistent estimator
[Gujarati - 2005]. A normally distributed data is reflected in its descriptive statistics.
Table 4.1 summarizes the mean and standard deviations of the dependent and
independent variables used in the study for all the commercial and Islamic banks. The
values of Jarque-Bera are significant. Thus it can be concluded that the data is not
normally distributed. Hence Ordinary Least Squares (OLS) estimation method is not a
better estimation method to be used as compared to Generalized Least Squares (GLS)
method [Gujarati - 2005].
Table: 4.1 Descriptive Statistics:
Sample: 2011 2015
ROA ROE LQR CAP CRR OBR IRR SIZ GDP
Mean 0.010629 0.148473 0.172253 0.085736 0.005995 0.276354-0.104364 5.017664 0.063200

32. 32
Median 0.010264 0.126806 0.174364 0.082322 0.005210 0.279230-0.001062 4.993638 0.064600
Maximum 0.020689 1.246228 0.297370 0.154282 0.020309 0.422948 7.712660 5.652524 0.065500
Minimum 0.003653 0.042479 0.075123 0.011908 4.24E-05 0.137088-4.403556 4.337330 0.060100
Std. Dev. 0.003927 0.173134 0.058485 0.024313 0.004071 0.072715 1.602252 0.312896 0.002377
Skewness 0.320018 5.833833 0.300449 0.262579 1.304442-0.030949 1.780949 0.041449-0.376734
Kurtosis 2.724200 37.58576 2.092837 4.769318 5.289037 2.392086 15.39624 2.385003 1.218273
Jarque-Bera 9.910707 2498.079 8.220042 6.386772 22.58620 7.700107 311.9133 6.722049 7.016748
Probability 0.034224 0.000000 0.043296 0.041033 0.000012 0.046503 0.000000 0.046962 0.029946
Sum 0.478317 6.681278 7.751392 3.858136 0.269756 12.43591-4.696398 225.7949 2.844000
Sum Sq.
Dev. 0.000678 1.318910 0.150500 0.026009 0.000729 0.232647 112.9573 4.307774 0.000249
Observations 45 45 45 45 45 45 45 45 45
Note. SD=standard deviation
4.1.2 Correlation Coefficients
Table 4.2 shows the correlation matrix of all the variables in the study. There is a
negative correlation between credit risk and ROE and ROA, negative relationship
between interest rate risk and ROA and ROE while a positive correlation between
liquidity risk and ROA and ROE. It can be seen that the variables are not highly
correlated with each other.
Table: 4.2 Correlation Matrix of the Variables:
ROA ROE LQR CAP CRR OBR IRR SIZ GDP
ROA 1.000000
ROE 0.363506 1.000000
LQR 0.326182 0.234866 1.000000
CAP 0.184728-0.510293-0.063312 1.000000
CRR-0.417219-0.303371-0.158593 0.473610 1.000000
OBR-0.004017-0.011167-0.105533 0.107661 0.074238 1.000000
IRR -0.086461-0.433929-0.175854 0.388070 0.185874 0.260159 1.000000
SIZ -0.164992-0.037333 0.012878 0.035509 0.180441-0.021876 0.099109 1.000000
GDP 0.197327 0.156367 0.006544-0.010107 0.001908-0.044056-0.200280-0.135193 1.000000

33. 33
4.1.3 Panel Unit Roots Test
It is a well-known fact that time series data are non-stationary. The presence of
non-stationary variables might produce spurious regression results. Following the work
of [45], before doing the panel data regression analysis, the standard unit root test was
performed to check for the stationarity of the data. Hence each variable was subjected
to panel unit root tests of Levin, Lin & Chu t*. In table 4.1, we have found that all the
variables are Unit Root free except GDP Growth. In case of GDP growth, we have taken
D(1), and then test whether it leads the data normal.
4.1.4 Normality Test
Then next, we have tested the normality of the data. The following graph shows
the result of normality test-
Table: 4.3 Unit Root Test
Sample: 2011 2015
OBS : 36
Levin, Lin & Chu t*
Automatic selection of maximum lags
Automatic lag length selection based on SIC: 0
Newey-West automatic bandwidth selection and Bartlett kernel
Variables Statistics Prob.
Return on Assets (ROA) -7.02014 0.0000
Return on Equity (ROE) -7.0529 0.0000
Liquidity Risk (LQR) -3.10302 0.0010
Credit Risk (CRR) -8.58569 0.0000
Off-Balance sheet Risk (OBR) -15.9663 0.0000
Interest Rate Risk (IRR) -7.85038 0.0000
Bank Size (SIZ) -6.64442 0.0000
Bank Equity Ratio (CAP) -6.16076 0.0000
GDP growth (GDP) -0.99225 0.1605

34. 34
Table: 4.4 Normality Test
0
2
4
6
8
10
12
-0.006 -0.004 -0.002 0.000 0.002 0.004 0.006 0.008
Series: Standardized Residuals
Sample 2011 2015
Observations 36
Mean -1.64e-18
Median -0.000258
Maximum 0.008633
Minimum -0.005091
Std. Dev. 0.002689
Skewness 0.744267
Kurtosis 4.047471
Jarque-Bera 6.211741
Probability 0.044786
The graph represents that the residuals are normally distributed as the JB is more
than 2 and its p value is also significant. The Kurtosis is more than 3 though the
Skewness is very high (Closer to zero is better) but it’s tolerable as other result are
signifies the model. So, residuals of the observations are normally distributed.
4.1.5 Regression Analysis
Now, we will observe the regression results from the table 4.5.1 (ROA) and 4.5.2
(ROE) and then we will comment and compare for each of them whether the results are
significant-
Table : 4.5 Regression Output: ROA
Dependent Variable: ROA
Method: Panel Least Squares
Date: 09/10/17 Time: 14:00
Sample (adjusted): 2012 2015
Periods included: 4
Cross-sections included: 9
Total panel (balanced) observations: 36
Variable Coefficient Std. Error t-Statistic Prob.
C -0.000147 0.008287 -0.017787 0.9859
LQR 0.017081 0.008758 1.950321 0.0620

35. 35
CRR -0.571890 0.125507 -4.556653 0.0001
OBR 0.001220 0.006957 0.175333 0.8622
IRR -0.001972 0.000695 -2.838563 0.0087
CRR_IRR 0.294916 0.115043 2.563514 0.0165
SIZ 0.000634 0.001561 0.406285 0.6879
CAP 0.076516 0.024483 3.125255 0.0043
D(GDP) 0.153931 0.120817 1.274083 0.2139
IB 0.000471 0.001015 0.464336 0.6463
R-squared 0.609808 Mean dependent var 0.009705
Adjusted R-squared 0.474741 S.D. dependent var 0.003264
S.E. of regression 0.002366 Akaike info criterion -9.025489
Sum squared resid 0.000145 Schwarz criterion -8.585623
Log likelihood 172.4588 Hannan-Quinn criter. -8.871964
F-statistic 4.514865 Durbin-Watson stat 1.040263
Prob(F-statistic) 0.001199
In case of ROA, we have been observing that the R2
is more than 50% and the
D-W is greater than R2
and it represents that the observations don’t contains
autocorrelation. The adjusted R2
is slightly less than 50% but F statistics represents
better result. So, the model is over all quite better representative. SD (errors) is also is
very low that is a good indicator. The shaded region includes CRR, IRR, CRR_IRR and CAP
have significant impact in profitability at 5% significant level. As well as at 10% level of
significance LQR is significant.
Table: 4.6 Regression Output: ROE
Dependent Variable: ROE
Method: Panel Least Squares
Date: 09/10/17 Time: 14:02
Sample (adjusted): 2012 2015
Periods included: 4

36. 36
Cross-sections included: 9
Total panel (balanced) observations: 36
Variable Coefficient Std. Error t-Statistic Prob.
C -0.174183 0.318507 -0.546874 0.5891
LQR 0.504711 0.336625 1.499325 0.1458
CRR -8.957801 4.824026 -1.856914 0.0747
OBR 0.764348 0.267391 2.858544 0.0083
IRR -0.212831 0.026707 -7.968994 0.0000
CRR_IRR 33.09452 4.421858 7.484302 0.0000
SIZ 0.062174 0.059991 1.036391 0.3096
CAP -3.502731 0.941049 -3.722156 0.0010
D(GDP) 6.010301 4.643786 1.294268 0.2070
IB 0.012255 0.039009 0.314161 0.7559
R-squared 0.834050 Mean dependent var 0.146822
Adjusted R-squared 0.776606 S.D. dependent var 0.192370
S.E. of regression 0.090923 Akaike info criterion -1.727478
Sum squared resid 0.214941 Schwarz criterion -1.287612
Log likelihood 41.09461 Hannan-Quinn criter. -1.573953
F-statistic 14.51931 Durbin-Watson stat 1.986709
Prob(F-statistic) 0.000000
But in case of ROE, the adjusted R2
is better than that of for ROA; It’s 0.78 and the
R2
is 0.83 which refer that the model is good representative to the variables. DW is
greater than R2
which represent that the observations are autocorrelation free. The
P-value of F statistic is 0.000000 that refers the better combined result. The shaded
region includes OBR, IRR, CRR_IRR and CAP have significant impact in profitability at 5%
significant level. As well as at 10% level of significance CRR is significant.

37. 37
Chapter Five: Recommendation and Conclusion
5.1 Recommendations
Firstly, Between the two result - Return on Equity is more satisfied than that of
Return On Asset as the adjusted R2
is far greater in ROE than ROA.
Secondly, it is known that the liquidity and profitability is negatively related but
the both results (t-statistic) the liquidity ratio is positively related and so is insignificant
that implies that the banking industry of Bangladesh tends to keep more liquid assets.
This ratio is not worse for this country because the call money rate (at short notice) is
higher and the socio-economic condition towards loan disbursement and recovery in
not quite satisfying as most of the sectors are corrupted though it’s improving day by
day; that is why liquidity is preferable (further analysis needed). We are observing that
CRR, IRR, CRR_IRR and CAP are significant in both the ROA and ROE.
Finally, it is seen that profitability in case of ROA measures is quite good in
banking industry but ROE is better that implies financial risk is bringing the equity capital
with more return in banking industry within those periods. So we can say that on those
periods both conventional and Islamic banks have been able to manage their financial
risk wisely and that is a good sign for the economy though many turmoil have been now
going on since after 2015 and we have experienced a worse decision over banking
industry and both banks in recent fiscal budget.
5.2 Conclusion
As Bangladesh is a developing country, contribution of banking sector both
conventional and Islamic plays an immeasurable role in the economy and development
of economy. We should pay wiser concentration to manage the financial risk both from
external and internal forces to let them bring profitability to both banks and the

38. 38
economy. The investment’s security must be increased and set free from fraud to
prevent the money laundering. Political instability raises the anxiousness among the
investors and the overall economy gets slower, thus the inflation increases and the IRR
also increases which lowers the profitability of banks. So, to make the banks stable and
thereafter the overall economy, the financial risk must be managed to a certain extent
by both the government and the respective banks.
SUMMARY OF THE FINDINGS
Hypothesis Findings
H1: The financial risks have an impact on the profitability of the
banks.
Inconclusive
Sub-hypotheses:
H1a: Credit risk has an impact on the profitability of the banks. Significant
H1b: Interest rate risk has an impact on the profitability of the
banks.
Significant
H1c: Liquidity risk has an impact on the profitability of the banks. Not Significant
5.3 Limitations of the study
In the way of this research conduct, I have to face many problems, specially, because of
limited time span and another two main limitations are -
1) Secondary data have been used in the study.
2) The number of banks is nine. If it would be possible to increase the number of

39. 39
banks, then the results will be more representative.
But, I hope that we will have a good look on the overall performance of banks’ financial
risk and their impact on profitability in this report.
References and Appendix
References
Bird, A., and Skinner, T. H., Enterprise risk management not for you?
Wrong. American Banker, 170(67), 2005, pp. 10
Sarker and Saha, (2011). Performance Indicators of Banking Sector in Bangladesh: A
Comparative Study, ASA University Review, Vol. 5 No. 1.
Paul, et al., (2013). Profitability and Liquidity of Conventional Banking and Islamic
Banking
in Bangladesh: A Comparative Study, European Journal of Business and
Management ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol.5, No.24.
Md. Helal Uddin, (2014). Measuring the Performance of Islamic Banks in Bangladesh: An
Exploratory Study - ISSN: 2308-5096(P) ISSN 2311-620X(O) [International
Journal of Ethics in Social Sciences Vol.2, No.1,].
Rana, et al., (2016). Profitability and liquidity of conventional banking and Islamic
banking in Bangladesh: A comparative study, ISSN Print: 2394-7500 ISSN Online:
2394-5869 Impact Factor: 5.2 IJAR 2016; 2(9): 318-327.
Abedin, (2016). Performance and prospects of Islamic banking in BD - Published:
Sunday, Jan 31, 2016 FE-PRI EAU.

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Sinkey, J. F., Jr., Commercial Bank Financial Management: In the Financial-Services
Industry.
New Jersey: Pearson Education International, 2002.
Angbazo, L., Commercial bank net interest margins, default risk, interest rate risk, and
off balance sheet banking. Journal of Banking and Finance, 21(1997), 55-87.
How, J. C., Melina, A. K., & Verhoeven, P., Islamic financing and bank risks: the case of
Malaysia. Thunderbird International Business Review, 47(1), pp.75-94, 2005.
Ho, T. S., & Saunders, A., The determinants of bank interest margins: theory and
empirical evidence. Journal of Financial and Quantitative Analysis, XVI (4),
pp.581-600, November 1981.
Athanasoglou, P. P., Brissimis, S. N., & Delis, M.. Bank-specific, industry-specific and
macroeconomic determinants of bank profitability. Journal of International and
Financial Institutions and Markets, (forthcoming), (2005).
Fathiyah, H., Capital structure and performance of Islamic banks and ibs commercial
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