South Asian Journal of Management

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Impact of Credit Risk Management on Bank Performance:Empirical Evidence from Bangladesh


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1 Institute of Business Administration, Jahangirnagar University, Savar, Dhaka-1342, Bangladesh
     

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This paper empirically examines the implications of credit risk management of 23 Dhaka Stock Exchange listed conventional commercial banks of Bangladesh over the period 2006- 2015. The study considers five credit risk measures and two control variables to identify their impacts on three different dimensions of bank performance. Upon conducting relevant diagnostic tests, fixed effect model with Driscoll-Kraay standard error has been selected as the most suitable model for all the three performance indicators. The results suggest that Capital Adequacy Ratio (CAR) has a significant positive association with banks’ performances measured by Return on Assets (ROA), Return on Equity (ROE) and Market-to-Book value Ratio (MBR) whereas Non-Performing Loan Ratio (NPLR) shows an inverse association with all the three performance measures. The study demonstrates a positive association of Loan to Deposit Ratio (LTDR) with ROA and ROE. On the contrary, Loan- Loss Provision Ratio (LLPR) has significant negative association with both ROA and ROE, while influencing MBR positively. The study also indicates that Geographic Focus Index (GFI) has a significant positive impact on MBR. Some policy guidelines have been suggested based on the findings of the study.

Keywords

Dhaka Stock Exchange, Fixed Effect, Geographic Focus Index, Performance Measures, Random Effect.
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  • Impact of Credit Risk Management on Bank Performance:Empirical Evidence from Bangladesh

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Authors

K. M. Zahidul Islam
Institute of Business Administration, Jahangirnagar University, Savar, Dhaka-1342, Bangladesh
Md Badrul Alam
Institute of Business Administration, Jahangirnagar University, Savar, Dhaka-1342, Bangladesh
Md Motaher Hossain
Institute of Business Administration, Jahangirnagar University, Savar, Dhaka-1342, Bangladesh

Abstract


This paper empirically examines the implications of credit risk management of 23 Dhaka Stock Exchange listed conventional commercial banks of Bangladesh over the period 2006- 2015. The study considers five credit risk measures and two control variables to identify their impacts on three different dimensions of bank performance. Upon conducting relevant diagnostic tests, fixed effect model with Driscoll-Kraay standard error has been selected as the most suitable model for all the three performance indicators. The results suggest that Capital Adequacy Ratio (CAR) has a significant positive association with banks’ performances measured by Return on Assets (ROA), Return on Equity (ROE) and Market-to-Book value Ratio (MBR) whereas Non-Performing Loan Ratio (NPLR) shows an inverse association with all the three performance measures. The study demonstrates a positive association of Loan to Deposit Ratio (LTDR) with ROA and ROE. On the contrary, Loan- Loss Provision Ratio (LLPR) has significant negative association with both ROA and ROE, while influencing MBR positively. The study also indicates that Geographic Focus Index (GFI) has a significant positive impact on MBR. Some policy guidelines have been suggested based on the findings of the study.

Keywords


Dhaka Stock Exchange, Fixed Effect, Geographic Focus Index, Performance Measures, Random Effect.

References