Determinants Of Banks Profitability In Emerging Markets

THE DETERMINANTS OF BANKS’ PROFITABILITY IN EMERGING MARKETS

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THE DETERMINANTS OF BANKS’ PROFITABILITY IN EMERGING MARKETS

Introduction

An emerging market has been used to describe a country that has some features of a

developed market but does not meet standards to be a developed market. It has always been

known that in any economy, there cannot be growth without the financial backup. This is where

banks come in to provide the financial cushion to various investors and entrepreneurs in the

economy. Due to banks being business entities, they must also align their activities with the

main reason for making profits. The level of profitability in financial institutions in emerging

markets is usually believed to be higher than that in developed markets. This is because

emerging markets require more financial support than developed markets and this translates to

banks offering more loans. These loans, in turn, translate to profits when repaid back with

interest assuming they do not turn into bad debts to the banks. In this proposal, a research

question is going to be generated in line with the project topic which is Determinants of banks

profitability in emerging markets.

Literature Review and Research Question

In one of the literature considered in the review, it is argued that the market structure

matters for bank's power in setting interest rates that can directly affect their performance (Ali

Mirzaei, 2013). It has also been stated that profitability and stability increase with an increased

interest margin revenue in a less competitive environment for emerging markets (Ali Mirzaei,

2013). Apart from market structures, several other factors like can also affect performance and

profitability of banks. The effect of inflation on a bank's earnings depends on whether it is

correctly anticipated by the bank (Davydenko, 2010). Leverage could also be used to determine a

bank's performance. Profitability performance increased when leverage was high (Bhavani,

2017). To this end, a comprehensive set of internal characteristics is included as determinants of

THE DETERMINANTS OF BANKS’ PROFITABILITY IN EMERGING MARKETS

bank's net interest margin and profitability. These internal factors include equity, overhead, and

interest-bearing assets (Naceur, 2003). The existing literature on banks' profitability is quite large

and provides a comprehensive examination of the effects of bankspecific, industry-specific, and

macroeconomic determinants of bank's profitability (Sharma, 2017).From the range of literature

discussed in the above review, it was decided that the following hypothesis is deduced:

Research Question: Are banks' performance and profitability reliant on the market structure.

Methodology and Data Collection

The methodology to be used in this research will be the quantitative approach and will be

the panel regression analysis in particular because it will entail collection of numerical data from

different banks that will be chosen for the research. This will entail the sampling of banks in

countries that are considered to be emerging markets.

Importance of the Study

First and foremost, the study will help in the appreciation of the importance of banks to

any economy whether developed or developing. It will also help in understanding the various

factors that affect the operations and ultimately the profitability of banks in an economic system.

It will especially benefit potential and existing investors as it will ultimately help them

understand the potential returns and how much capital to invest. Furthermore, it will also help

existing and start-up banks in emerging markets to find what hinders and regulates cash flow to

generate profit.

Research Structure

THE DETERMINANTS OF BANKS’ PROFITABILITY IN EMERGING MARKETS

The research is divided into the following sections. Chapter one outlines the background or

introduction; chapter two is about the literature review and research question, chapter three

covers methodology of the research and data, chapter four will talk about the findings of the

research and chapter five will be about the conclusion of the study.

THE DETERMINANTS OF BANKS’ PROFITABILITY IN EMERGING MARKETS

References

Ali Mirzaei, T. M. a. G. L., 2013. Journal of Banking and Finance. Does market structure matter

on bank's profitability and stability? Emerging vs. advanced economies, p. 3.

Bhavani, A. M. a. G., 2017. Journal on Accounting and Finance Research. What Determines

Bank's Profitability? Evidence from Emerging Markets- The Case of the UAE Banking Sector,

6(1), p. 12.

Davydenko, A., 2010. Undergarduate Economic Review. Determinants of Bank Profitability in

Ukraine, 7(1), p. 32.

Naceur, S. B., 2003. The Determinants of The Tunisian Banking Industry Profitability: Panel

Evidence, p. 17.

Sharma, F. L. a. D. D., 2017. Determinants of Banks' Profitability: Review and Assessment, 7(1),

p. 14.

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