Determinants of Bank Profitability—Do Institutions, Globalization, and Global Uncertainty Matter for Banks in Island Economies? The Case of Fiji

Author:

Chand Shasnil Avinesh1ORCID,Kumar Ronald Ravinesh2ORCID,Stauvermann Peter Josef3ORCID,Shahbaz Muhammad45

Affiliation:

1. School of Economics and Finance, Fiji National University, Suva P.O. Box 3722, Fiji

2. Department of Economics and Finance, The Business School, Saigon South Campus, RMIT University, Ho-Chi-Minh City 700000, Vietnam

3. Department of Global Business and Economics, Changwon National University, Changwon 51140, Republic of Korea

4. Department of International Trade and Finance, School of Management and Economics, Beijing Institute of Technology, Beijing 100081, China

5. GUST Center for Sustainable Development (CSD), Gulf University for Science and Technology, Hawally 32093, Kuwait

Abstract

The objective of this study is to examine the influences of institutions, globalization, and world uncertainty on bank profitability in small developing economies. Consequently, we emphasize the significance of both bank-specific and other external factors influencing bank profitability. The empirical estimation is based on seven banks in Fiji—a small island economy—over the period 2000–2021. Together with bank-specific and macro factors, we account for institutions, globalization, and world uncertainty in analyzing the determinants of bank profitability. The study uses the fixed-effect estimation method. From the results, we observe that bank-specific variables, like the net interest margin, non-interest income, bank size, and capital adequacy ratio, are positively associated with bank profitability. Non-performing loans and credit risk are negatively associated with bank profitability. Macro variables, such as real GDP growth and remittances, have positive effects on bank profitability. Institutional factors, such as government effectiveness and voice and accountability, are positively associated with bank profitability. Regarding globalization, we find that it supports bank profitability. Global uncertainty and the Global Financial Crisis (2007–2008) are positively associated with profitability, whereas the global pandemic (COVID-19) is negatively associated. This study underscores the need to analyze the bank performance with factors beyond those reported in financial statements to derive a comprehensive understanding and appreciation of the complex nature of banking operations.

Publisher

MDPI AG

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