DETERMINANTS OF PROFITABILITY OF COMMERICIAL BANKS IN NEPAL

DETERMINANTS OF PROFITABILITY OF COMMERICIAL

BANKS IN NEPAL

A dissertations submitted to the office of the Dean, Faculty of Management in

partial fulfilment of the requirement for the Master’s Degree

by

SANIPA KUMARY CHAUDHARY

Roll. No: 1230/17

SANIPA KUMARY CHAUDHARY

Registration No: 7-2-542-102-2010

Central department of Management

Kathmandu, Nepal

March, 2021
2021
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Certifications of Authorship

I hereby corroborate that I have researched and submitted the final draft of
dissertation entitled: Determinants of profitability of Commercial Banks: The work of
this dissertation has not been submitted previously for the proposal of content of any
degrees nor has it been proposed and presented as part of requirements for any other
academic purposes. The assistance and cooperation that I have received during this
research work has been acknowledged. In addition, I declare that all information
source and literature used are cited in the reference section of the dissertation.

...................................

Sanipa Kumari Chaudhary

March, 2021
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Report of Research Committee

Ms. Sanipa Kumara Chaudhary defended research proposal entitled determinants of

profitability of Commercial banks in Nepal; successfully. The research committee has
registered the dissertation for further progress. It is recommended to carry out the
work as per suggestions and guidance of supervisor Prof. Sanjay Kumar Shrestha and
submit the thesis for evaluation and viva voce examination.

Prof. Bhawani Shanker Acharya Dissertation Proposal Defended Date:

Signature: ……………… 3th September, 2019

Position: Supervisor

Prof. Dr. Sanjay Kumar Shrestha Dissertation Submitted Date:

Signature: ……………… 12th March, 2021

Position: Supervisor

Prof. Dr. Sanjay Kumar Shrestha Dissertation Viva Voce Date:

Signature: ……………… 11th March, 2021
Position: Research Committee Head
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Approval Sheet
We have examined the dissertation entitled “Determinants of profitability of
commercial banks in Nepal” presented by Sanipa Kumara Chaudahry, a candidate
for the degree of Master of Business Studies (MBS) and conducted the viva voce
examination of the candidate. We hereby certify that the thesis is worthy of
acceptance.

………………………………
Prof. Dr. Sanjay Kumar Shrestha
Dissertation Supervisor

……….……………………..

Reader Dr. Dhurba Lal Pandy

Internal Examiner

……………………….…………

Lecturer Phul Prasad Subedi

External Examiner

…………………..…….…
Prof. Dr. Sanjay Kumar Shrestha
Chairperson, Research Committee

……………………….
Prof. Dr. Ramji Gautam
Head of Department

Date:
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Acknowledgements

I am heartily thankful to my supervisor, Prof. Dr. Sanjay Kumar Shrestha, whose

encouragement, guidance and support from the initial to the final level enabled me to
develop an understanding of the subject. His insightful scholarship and meticulous
accuracy were instrumental in shaping this work into its final form.

I would like thank Head of Department, Prof. Dr. Ramji Gautam and Research
Committee Head, Prof. Dr. Sanjay Kumar Shrestha for their constant support.

The assistance of the academic and non-academic staff at the Central Department of
Management, is also gratefully acknowledged. Their dedication to assist the students
in many ways created a warm atmosphere and made the learning process easier.

Without the unconditional love and support from my family, I could have never
accomplished this. In this respect, I am deeply grateful to my mother, Shyama Devi
Chaudhary and my father, Kashi Prasad Chaudhary and my husband Tara Prasad
Chaudhary who have given an enormous amount of encouragement throughout this
journey.

My deepest gratitude to my friends Aashish Adhikari, Sapana Shrestha, Aakriti

Adhikari and Krishna dev Bhatta who supported me during my study. Words are not
enough to describe my indebtedness to them.

To the above-mentioned people and to those who have not been mentioned, your
sacrifice and encouragement are greatly appreciated and will always be in my
memory. I am deeply appreciative of the time, dedication and encouragement that
they have significantly contributed to the completion of my thesis.

SANIPA KUMARI CHAUDHARY

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Table of Content

Page No:

Title page.........................................................................................................................i

Certificate of Authorship................................................................................................ii

Report of Research Copmmittee...................................................................................iii

Approval Sheet...............................................................................................................iv

Acknowledgements..........................................................................................................v

Table of contants...........................................................................................................vi

List of Tables.................................................................................................................ix

List of figures..................................................................................................................x

Abbreviations.................................................................................................................xi

Abstracts.......................................................................................................................xii

CHAPTER 1: INTRODUCTION............................................................................1-7

1.1 Background of the study...........................................................................................1

1.2 Problem statement....................................................................................................4

1.3 Objectives of the study.............................................................................................5

1.4 Rational of the study.................................................................................................5

1.5 Limitations of the study............................................................................................6

1.6 Chapter Plan.............................................................................................................7

CHAPETR 2: LITERATURE REVIEW..............................................................8-28

2.1 Introduction..............................................................................................................8

2.2 Theoretical review..................................................................................................12

2.3 Empirical review....................................................................................................14

2.3.1 Review of journal articles....................................................................................14

2.3.2 Review of previous thesis....................................................................................22

2.3.3 Summary of articles and thesis............................................................................25

2.4 Research gap...........................................................................................................27

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CHAPTER 3: RESEARCH METHODOLOGY...............................................29-38

3.1 Introduction............................................................................................................29

3.2 Research design......................................................................................................29

3.3 Population, Sample, and sampling design..............................................................29

3.4 Data collection procedure.......................................................................................30

3.5 Data analysis tools and techniques.........................................................................31

3.6 Data analysis tools and techniques.........................................................................31

3.7 Conceptual framework..........................................................................................35

CHAPTER4: RESULTS AND DISCUSSION...................................................39-49

4.1 Data presentations and analysis............................................................................39

4.2 Descriptive statistics..............................................................................................42

4.3 Correlation analysis………....................................................................................43

4.4 Regression analysis..............................................................................................44

4.5 Findings…………….............................................................................................47

4.6 Discussion..............................................................................................................48

CHAPTER 5: SUMMARY AND CONCLUSION.............................................50-55

5.1 Summary................................................................................................................50

5.2 Conclusion..............................................................................................................53

5.3 Implications............................................................................................................54

REFRENCES........................................................................................................56-65

APPENDICES.......................................................................................................66-71
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LIST OF TABLES

Table Number Title Page No.

4.1 Capital adequacy ratio 39

4.2 Loan to total assets 40

4.3 Deposit to total assets 38

4.4 Return on equity 41

4.5 Return on assets 41

4.6 Descriptive statistics 42

4.7 Correlation analysis between ROA and explanatory variable 43

4.8 Correlation analysis between ROE and explanatory variable 44

4.9 Regression analysis between ROA and explanatory variable 44

4.10 Regression analysis between ROA and explanatory variable 46

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LIST OF FIFURE

Page No:

3.7.1 Conceptual Framework 35

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ABSTRACT

High revenue generation and wholesome growth of the banks are the utmost aim of a
commercial bank which come with careful insight of the prevailing situation and
prognosis of the upcoming hurdles. There are certain core factors that govern these
and this study was conducted with the objective to analyze the bank specific factors
that affect the profitability of commercial banks in Nepal.

Out of prevailing 28 commercial banks, secondary data of six commercial banks from
year 2011/12 to 2017/18 were considered to analyze the factors that affects
profitability and tested the existing relationship between explanatory variables (capital
adequacy, loan to total assets, deposit to total assets) and profitability measurement:
Return on Assets and Return on Equity by using correlation analysis.

The study used descriptive and analytical research approach to analyze factors that
affect profitability and the significance was tested at 5% level of significance. SPSS
and Excel software were used to analyze the data. Multiple regression models were
used to investigate the impact of explanatory variables on bank profitability.

The correlation analysis revealed that return on assets (ROA) had negative correlation
with explanatory variables capital adequacy ratio (CAR), deposit to total assets
(DTAR), Loan to total assets (LTAR) whereas it had positive correlation with ROA.
Among these explanatory variables capital adequacy ratio (CAR) had significant
positive relation with ROE where as DTAR and LTAR showed negative relationship
with ROE.

The empirical result revealed that capital adequacy, loan to total assets, deposit to
total assets had insignificant negative impact on ROA whereas capital adequacy ratio,
loan to total assets had negative impact on ROE whereas Deposit to total assets had
significant positive impact on ROE.
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ABBREVIATIONS

BOK : Bank of Kathmandu Limited.

CAR : Capital adequacy Ratio

DTAR : Deposit to total assets

HBL : Himalayan Bank Limited

LTAR : Loan to total assets

MBL : Machhhapuchre Bank Limited

NABIL : Nabil Bank Limited

NBBL : Nepal Bangladesh Bank Limited

ROA : Return on Assets

ROE : Return on Equity

SBIBL : Nepal SBI Bank Limited