META ANALYSIS ON THE DETERMINANTS OF COMMERCIAL BANK’S PROFITABILITY: (A CONCEPTUAL FRAME WORK AND MODELLING)

Abstract

The purpose of this paper is to review the determinants of commercial banks’ profitability and to compare or combine results across sets of similar studies and contrasting the significant deviations in those findings by different scholars and to suggest a comprehensive model that incorporates macroeconomic, industry-specific and bank-specific determinants of commercial banks profitability. To achieve these objectives the paper has been designed to gleaned data from various national and international journal articles together with the basic theories relating to the determinants of commercial bank’s profitability irrespective of countries or economic level in which the banks are operating. Most of the research works so far, either in developed or developing counties, regarding the determinants of commercial banks profitability, comes across divergent results with the application of different models (i.e. pooled ordinary least square is mostly commonly applied by scholars in those countries). However, in finance the distribution of the data is often heavy-tailed and skewed with numerous large outliers, which violate the assumptions of classical linear regression. The variables investigated across studies have got uncommon concern by scholars. Most of the scholars used the traditional accounting measures for analysis towards determinants of banks’ profitability; ROA and ROE using multiple linear regression models. Economic measures of profitability are not used due to the lack of data and because the disclosed parameters are subject to internal policies and assessments which cannot be generalized or validated. I recommend the mixed research approach and panel data with the GMM model estimator and the inclusion of all banks specific, industry/sector specific and macro economic factors to better understand the determinants of the variations in the performance of commercial banks irrespective of the level of economic development.