Financial strength of banking sector in Bangladesh: a CAMEL framework analysis

Abstract

PurposeThis paper investigates the financial strength of banks in Bangladesh and factors affecting the financial strength over the years 2010–2015 on 35 banks.Design/methodology/approachAdditive value function with CAMEL rating (capital stength, asset quality, managerial efficiency, earning ability, liquidity) has been employed to calculate banks’ financial strength index (FSI). In the second stage, panel regression has been exercised to find out the determinants of banks’ financial strength.FindingsEmpirical finding exhibits that the Islamic banks of Bangladesh are financially stronger and outperform conventional and Islamic window banks with higher liquidity. In the ownership category, private banks have more financial strength with higher capital strength, asset quality, managerial efficiency and earning ability than public banks. Bank size, loan recovery, salary and banking sector development positively affect whereas the loan-asset negatively affect the bank’s financial strength in Bangladesh.Research limitations/implicationsThis study has its limitations despite its importance. CAMELS is a more improved form than using CAMEL. But because of the data deficiency on “S” which represents sensitivity, it would not be possible to use CAMELS framework. Further researchers could incorporate this.Practical implicationsGovernment and banks should allow Islamic banks to enter the market on easy terms because of their outstanding performance in the existing market. In addition, banks should provide loans with consideration so that they cannot create credit risk. In addition, they should calculate composite financial strength annually to understand which components they need to work on.Originality/valueThis study extends the extant result on the composite FSI. It is hard to examine the financial strength of banks using only ratio value, which misleads most of the time. The study offers evidence on how the FSI provides more rigorous results and what are the factors contribute most to the financial strength of banks.