Determinants of bank profitability: Evidence from the emerging economy

Abstract

This study examines the determinants of bank profitability in Zimbabwe, a country that has faced severe economic challenges in the past decade. To address this issue, we use a panel data analysis of 11 commercial banks over the period 2011–2020 and apply the system generalised method of moments (GMM) estimator to control heterogeneity and endogeneity issues. We find that bank specific factors, such as non-interest income, liquidity, cost efficiency, capital adequacy, and bank stability, have a positive and significant impact on bank profitability, while the industry factor, bank concentration, has a negative and significant impact on bank profitability. We also find that macroeconomic factors, such as gross domestic product (GDP) and inflation, do not have a significant influence on bank profitability. This result is surprising given the high inflation and low growth rates experienced by Zimbabwe in recent years. Moreover, we find that regulatory capital weakens the positive effect of bank stability on bank profitability in Zimbabwe. This result suggests that higher capital requirements may reduce the risk-taking incentives or opportunities of banks, which may lower their profitability potential. Finally, we find no evidence of a moderating effect of fintech on bank performance. This result implies that fintech may not significantly impact the competitiveness and performance of banks in Zimbabwe in non interest income activities. Our study concludes that bank profitability in Zimbabwe is mainly determined by internal factors that are under the control of bank managers and regulators, rather than external factors that are beyond their influence. Based on these findings, we provide several policy implications and recommendations for enhancing bank profitability and fostering a sound and resilient banking sector in Zimbabwe.