Impact of off-balance sheet activities on bank profitability: Evidence from Bangladesh

https://doi.org/10.35912/ijfam.v6i2.2510
Published: Dec 20, 2024

Abstract:

Purpose: This study explores the role of off-balance sheet (OBS) activities in enhancing bank profitability in Bangladesh. In this emerging economy, banks increasingly rely on such exposures to diversify revenue streams. Despite their growing significance, the impact of OBS activities—such as loan commitments, guarantees, and derivatives—on profitability remains underexplored in similar contexts.

Methods: Using a panel dataset of Bangladeshi banks, the study employs Generalized Least Squares (GLS) and Panel Corrected Standard Errors (PCSE) models to address key methodological challenges, including heteroskedasticity and cross-sectional dependency. These techniques ensure robust and reliable findings.

Results: The findings reveal a positive and statistically significant relationship between OBS activities and bank profitability, emphasizing their role in enhancing financial performance without increasing balance sheet risks. This relationship holds even after controlling for factors such as bank age, credit risk, lending practices, bank size, GDP growth, and the COVID-19 pandemic.

Limitations: The study focuses on a single emerging economy, which may limit the generalizability of the findings. Additionally, the dataset spans a specific period, restricting insights into long-term effects.

Contribution: This research contributes to the limited literature on OBS activities in emerging markets, providing valuable insights for bank managers and policymakers. Managers can leverage OBS activities to boost profitability, while regulators must maintain oversight to ensure financial stability. The study also offers a foundation for future research on long-term dynamics and cross-country comparisons.

Keywords:
1. Off-balance sheet
2. ROA
3. PCSE
4. Credit risk
5. GDP
Authors:
1 . Md. Adnan Ahmed
Bangladesh Institute of Capital Market, Dhaka, Bangladesh
2 . Karin Paulina Rozario
International Business, IESEG School of Management, Lille, France
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How to Cite
Ahmed, M. A., & Rozario, K. P. (2024). Impact of off-balance sheet activities on bank profitability: Evidence from Bangladesh. International Journal of Financial, Accounting, and Management, 6(2), 283–299. https://doi.org/10.35912/ijfam.v6i2.2510
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Issue & Section
Vol. 6 No. 2 (2024): September
Articles
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This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

References

    Aktan, B., Chan, S.-G., Žikovi?, S., & Evrim-Mandaci, P. (2013). Off-balance sheet activities impact on commercial banks performance: An emerging market perspective. Economic research-Ekonomska istraživanja, 26(3), 117-132.

    Al-Tahat, S. S., & AbuNqira, N. M. (2016). The impact of off-balance sheet activities (OBS) on the banking risk and revenue growth for Jordanian commercial banks listed on the Amman Stock Exchange (ASE). Research Journal of Finance and Accounting, 7(18), 82-92.

    Ali, S. A., & Ghazali, Z. (2018). Impact of firm size on profitability: A comparative study of Islamic Bank and commercial Bank in Pakistan. Global Journal of Management And Business Research, 18(5), 30-35.

    Aluonzi, B., Byamukama, E., Marus, E., & Charity, T. (2024). Credit risk management: An imperative for the profitability of Centenary Bank Kabale Branch. International Journal of Financial, Accounting, and Management, 6(1), 19-31.

    Angbazo, L. (1997). Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking. Journal of Banking & Finance, 21(1), 55-87.

    Bhuiya, M. M. M., Miah, M. M., & Chowdhury, T. U. (2023). The Impact of Credit Risk on the Profitability of Selected Commercial Banks of Bangladesh. Asian Journal of Managerial Science, 12(1), 19-25.

    Calice, G., & Savoia, F. (2024). The effects of stress testing on US banks' off?balance sheet activities. Financial Markets, Institutions & Instruments.

    Ebenezer, O. O., & Omar, W. A. W. (2016). The empirical effects of credit risk on profitability of commercial banks: Evidence from Nigeria. International Journal of Science and Research, 5(8), 1645-1650.

    Gazi, M. A. I., Alam, M., Hossain, G., Alam, S., Rahman, M. K., Nahid, M., & Hossain, A. I. (2021). Determinants of profitability in banking sector: Empirical evidence from Bangladesh. Universal Journal of Accounting and Finance.

    Gizaw, M., Kebede, M., & Selvaraj, S. (2015). The impact of credit risk on profitability performance of commercial banks in Ethiopia. African journal of business management, 9(2), 59.

    Hassan, M. K. (1993). The off-balance sheet banking risk of large US commercial banks. The Quarterly Review of Economics and Finance, 33(1), 51-69.

    Hindi, N. M., & Sundaram, S. (2002). The Relation Between Off-Balance Sheet Activities and US Bank Profitability. Journal of Accounting and Finance Research, 10(3), 15.

    Hossain, M. S., & Saif, A. N. M. (2019). Impact of firm size on financial performance of banking companies in Bangladesh. Journal of Banking & Financial Services, 11(2), 143-160.

    Ilaboya, O. J., & Ohiokha, I. F. (2016). Firm age, size, and profitability dynamics: a test of learning by doing and structural inertia hypotheses. Business and Management Research, 5(1), 29-39.

    Katusiime, L. (2021). COVID-19 and bank profitability in low-income countries: the case of Uganda. Journal of Risk and Financial Management, 14(12), 588.

    Khasawneh, A. Y., & Al-Khadash, H. A. (2014). Risk and profitability in the Middle East and North Africa banking system: An examination of off-balance sheet activities. The International Journal of Business and Finance Research, 8(3), 13-26.

    Majumder, M. T. H., & Uddin, M. J. (2017). The determinants of profitability of nationalized banks in Bangladesh. International Journal of Economics and Business Research, 13(4), 335-348.

    Martin, K. A. (2017). Determinants of bank profitability in Bangladesh. Paper presented at the 20th Biennial Conference on Economics and Ethics of the Bangladesh Economic Association.

    Nurullah, A., Gozali, E. O. D., Hamzah, R. S., Bakti, H., Khasman, R., & Maharani, M. A. (2024). An assessment of banking sector performance in Indonesia. International Journal of Financial, Accounting, and Management, 5(4), 407-417.

    Opoku, R. T., Angmor, P. L., & Boadi, L. A. (2016). Credit risk and bank profitability: Evidence from Ghana stock exchange. Journal for Studies in Management and Planning, 2(3), 89-96.

    Papanikolaou, N. I., & Wolff, C. C. (2014). The role of on-and off-balance-sheet leverage of banks in the late 2000s crisis. Journal of Financial Stability, 14, 3-22.

    Rahman, M. J., & Yilun, L. (2021). Firm size, firm age, and firm profitability: evidence from China. Journal of Accounting, Business and Management (JABM), 28(1), 101-115.

    Rahman, M. M., Hamid, M. K., & Khan, M. A. M. (2015). Determinants of bank profitability: Empirical evidence from Bangladesh. International journal of business and management, 10(8), 135.

    Ramchandani, K., & Jethwani, D. (2017). Impact of Credit Deposit Ratio (CDR) on Bank Profitability: Evidence from scheduled commercial banks of India. KAAV International Journal of Economics, Commerce & Business Management, 4(4), 183-190.

    Tan, Y., & Floros, C. (2012). Bank profitability and GDP growth in China: a note. Journal of Chinese Economic and Business Studies, 10(3), 267-273.

    Tharu, N. K., & Shrestha, Y. M. (2019). The influence of bank size on profitability: An application of statistics. International Journal of Financial, Accounting, and Management, 1(2), 81-89.

    Tosin, I. O., & Otonne, A. (2019). A comparative analysis of the determinants of profitability of commercial and microfinance banks in Nigeria. International Journal of Financial, Accounting, and Management, 1(3), 173-182.

    Zhang, Q., Chen, S., & Jin, Y. (2020). The impact of off-balance-sheet regulations on bank risk-taking: Evidence from China. Research in international business and finance, 54, 101297.

  1. Aktan, B., Chan, S.-G., Žikovi?, S., & Evrim-Mandaci, P. (2013). Off-balance sheet activities impact on commercial banks performance: An emerging market perspective. Economic research-Ekonomska istraživanja, 26(3), 117-132.
  2. Al-Tahat, S. S., & AbuNqira, N. M. (2016). The impact of off-balance sheet activities (OBS) on the banking risk and revenue growth for Jordanian commercial banks listed on the Amman Stock Exchange (ASE). Research Journal of Finance and Accounting, 7(18), 82-92.
  3. Ali, S. A., & Ghazali, Z. (2018). Impact of firm size on profitability: A comparative study of Islamic Bank and commercial Bank in Pakistan. Global Journal of Management And Business Research, 18(5), 30-35.
  4. Aluonzi, B., Byamukama, E., Marus, E., & Charity, T. (2024). Credit risk management: An imperative for the profitability of Centenary Bank Kabale Branch. International Journal of Financial, Accounting, and Management, 6(1), 19-31.
  5. Angbazo, L. (1997). Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking. Journal of Banking & Finance, 21(1), 55-87.
  6. Bhuiya, M. M. M., Miah, M. M., & Chowdhury, T. U. (2023). The Impact of Credit Risk on the Profitability of Selected Commercial Banks of Bangladesh. Asian Journal of Managerial Science, 12(1), 19-25.
  7. Calice, G., & Savoia, F. (2024). The effects of stress testing on US banks' off?balance sheet activities. Financial Markets, Institutions & Instruments.
  8. Ebenezer, O. O., & Omar, W. A. W. (2016). The empirical effects of credit risk on profitability of commercial banks: Evidence from Nigeria. International Journal of Science and Research, 5(8), 1645-1650.
  9. Gazi, M. A. I., Alam, M., Hossain, G., Alam, S., Rahman, M. K., Nahid, M., & Hossain, A. I. (2021). Determinants of profitability in banking sector: Empirical evidence from Bangladesh. Universal Journal of Accounting and Finance.
  10. Gizaw, M., Kebede, M., & Selvaraj, S. (2015). The impact of credit risk on profitability performance of commercial banks in Ethiopia. African journal of business management, 9(2), 59.
  11. Hassan, M. K. (1993). The off-balance sheet banking risk of large US commercial banks. The Quarterly Review of Economics and Finance, 33(1), 51-69.
  12. Hindi, N. M., & Sundaram, S. (2002). The Relation Between Off-Balance Sheet Activities and US Bank Profitability. Journal of Accounting and Finance Research, 10(3), 15.
  13. Hossain, M. S., & Saif, A. N. M. (2019). Impact of firm size on financial performance of banking companies in Bangladesh. Journal of Banking & Financial Services, 11(2), 143-160.
  14. Ilaboya, O. J., & Ohiokha, I. F. (2016). Firm age, size, and profitability dynamics: a test of learning by doing and structural inertia hypotheses. Business and Management Research, 5(1), 29-39.
  15. Katusiime, L. (2021). COVID-19 and bank profitability in low-income countries: the case of Uganda. Journal of Risk and Financial Management, 14(12), 588.
  16. Khasawneh, A. Y., & Al-Khadash, H. A. (2014). Risk and profitability in the Middle East and North Africa banking system: An examination of off-balance sheet activities. The International Journal of Business and Finance Research, 8(3), 13-26.
  17. Majumder, M. T. H., & Uddin, M. J. (2017). The determinants of profitability of nationalized banks in Bangladesh. International Journal of Economics and Business Research, 13(4), 335-348.
  18. Martin, K. A. (2017). Determinants of bank profitability in Bangladesh. Paper presented at the 20th Biennial Conference on Economics and Ethics of the Bangladesh Economic Association.
  19. Nurullah, A., Gozali, E. O. D., Hamzah, R. S., Bakti, H., Khasman, R., & Maharani, M. A. (2024). An assessment of banking sector performance in Indonesia. International Journal of Financial, Accounting, and Management, 5(4), 407-417.
  20. Opoku, R. T., Angmor, P. L., & Boadi, L. A. (2016). Credit risk and bank profitability: Evidence from Ghana stock exchange. Journal for Studies in Management and Planning, 2(3), 89-96.
  21. Papanikolaou, N. I., & Wolff, C. C. (2014). The role of on-and off-balance-sheet leverage of banks in the late 2000s crisis. Journal of Financial Stability, 14, 3-22.
  22. Rahman, M. J., & Yilun, L. (2021). Firm size, firm age, and firm profitability: evidence from China. Journal of Accounting, Business and Management (JABM), 28(1), 101-115.
  23. Rahman, M. M., Hamid, M. K., & Khan, M. A. M. (2015). Determinants of bank profitability: Empirical evidence from Bangladesh. International journal of business and management, 10(8), 135.
  24. Ramchandani, K., & Jethwani, D. (2017). Impact of Credit Deposit Ratio (CDR) on Bank Profitability: Evidence from scheduled commercial banks of India. KAAV International Journal of Economics, Commerce & Business Management, 4(4), 183-190.
  25. Tan, Y., & Floros, C. (2012). Bank profitability and GDP growth in China: a note. Journal of Chinese Economic and Business Studies, 10(3), 267-273.
  26. Tharu, N. K., & Shrestha, Y. M. (2019). The influence of bank size on profitability: An application of statistics. International Journal of Financial, Accounting, and Management, 1(2), 81-89.
  27. Tosin, I. O., & Otonne, A. (2019). A comparative analysis of the determinants of profitability of commercial and microfinance banks in Nigeria. International Journal of Financial, Accounting, and Management, 1(3), 173-182.
  28. Zhang, Q., Chen, S., & Jin, Y. (2020). The impact of off-balance-sheet regulations on bank risk-taking: Evidence from China. Research in international business and finance, 54, 101297.