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Born in 1971, Bangladesh witnessed a phenomenal growth in banking industry since the liberalization policy was introduced in 1980s. Before the liberalization policy, there were only four domestic banks (Sonali Bank, Pubali Bank, Rupali Bank, and Janata Bank) in Bangladesh and they were nationalized. There were only three foreign banks.However, there was no private bank. As a result, there was no competition in the banking industry of Bangladesh. The banking market was highly concentrated and dominated by four nationalized banks. The profitability of banks was highly unsatisfactory due to risk and competition. Still banking industries are facing those types of risk and competition for generating profit. As much as possible we are trying to find out sort of risk and competition of bank in Bangladesh. Bank lending rates were taken as a proxy for interest rate while Return on Assets (ROA) and Return on equity (ROE) were taken as a profitability of the banks. The failure model was used in the study to witness the effects of interest rate on profitability. The results show that the interest rate has more effects on both ROA and ROE in private banks as compared to the public sector banks.We introduce a new perspective to systematically investigate the cause-and-effect relationships among competition, innovation, risk-taking, and profitability in the Bangladesh banking industry. Our hypothesis are tested by the structural equation modeling (SEM), and the empirical results show that (i) risk-taking is positively related to profitability; (ii) innovation positively affects both risk-taking and profitability, and the effect of innovation on profitability works both directly and indirectly; (iii) competition negatively affects risk-taking but positively affects both innovation and profitability, and the effects of competition on risk-taking and profitability work both directly and indirectly; (iv) there is a cascading relationship among market competition and bank innovation, risk-taking, and profitability. 1. INTRODUCTION This Research paper try to assess bank performance, competition and their relationship empirically by using banking sector data and individual bank data from Bangladesh. That why we take some on the bank in Bangladesh to find out the Return on assets and data envelopment analysis grounded bank efficiency are used as bank performance measures, whereas eight structural measures are employed for assessing competition followed by the adoption of regression analysis for identifying its impact. The findings research an improvement of bank performance with a few fluctuations in between the sample periods under study. On the other hand, the level of competition has been consistently increasing in the banking sector, as pointed out by all structural measures and the profitability is ups and down year by year. The regression result shows evidence of a negative relationship between competition and bank performance. It is required to revisit the structural changes of the banking sector. In particular, the regulatory authorities need to ensure necessary incentives for banks, particularly for private banks, to improve their performance in terms of profitability and efficiency. Concerning the banking sector of Bangladesh, the objective of accelerating competition and banking sector performance has been accomplished by the government by adopting different policies including introduction of private sector banks in 1982, initiation of denationalizing state-owned banks in 1983, and declaration of Financial Sector Reform Program (FSRP) for deregulating the banking sector in 1989 by introducing relaxation of reserve requirements, withdrawal of state directed credit policy, development of legal infrastructure, adoption of international standard for loan screening and monitoring, and liberalization of deposit and lending rates (Debnath, 2004). The policy initiative undertaken by the government during 2000 for merging or closing down of unproductive branches of state-owned banks played significant role in creating level playing ground for the private and foreign banks that emerged into the market during the liberalization framework. 2. PROBLEM STATEMENTS: Identifying the impact of risk and competition among 3 banks in Bangladesh to find out their risk analysis competition and profitability on based on the Banking financial year. Aim The aim of the research is to find out the bank’s profitability by executing impact of risk and competition among the Banks of Bangladesh. Objectives The objective of the research is identifying and analyzing the impact of risk with the competition among the banks and to find out the profitability of those banks in Bangladesh. Individual objective To identify the risk of Banks To find out the impact of risk of the banks To execute the competition among the banks To find out the bank’s profitability among the bank in Bangladesh. 3. DEFINITION OF TERMS Impact of risk: Once you have identified the risks to your financial institution, you need to assess the possible impact of those risks. You need to separate minor risks that may be acceptable from major risks that must be managed immediately. Competition of Bank: The global financial crisis reignited the interest of policy makers and academics in bank competition and the role of the state in competition policies (that is, policies and laws that affect the extent to which banks compete). Some believe that increases in competition and financial innovation in markets such as subprime lending contributed to the financial turmoil. Others worry that the crisis and government support of the largest banks increased banking concentration, reducing competition and access to finance, and potentially contributing to future instability as a result of moral hazard problems associated with too-big-to-fail institutions Bank Profitability: Like all businesses, banks profit by earning more money than what they pay in expenses. The major portion of a bank's profit comes from the fees that it charges for its services and the interest that it earns on its assets. Its major expense is the interest paid on its liabilities. The major assets of a bank are its loans to individuals, businesses, and other organizations and the securities that it holds, while its major liabilities are its deposits and the money that it borrows, either from other banks or by selling commercial paper in the money market. 4. REVIEW OF THE RELATED LITERATURE: The banking literature remains divided over the conflicts arising out of the SCP paradigm, also known as the structure performance paradigm, and the ES paradigm. The SCP hypothesis, which, according to Park (2009, p.654) and Seelanatha (2010, p.21), dates back to Mason (1939), is the oldest and traditional hypothesis. It states that the performance of banks largely depends upon the structure of the market such as the number of banks and the market shares of banks; and the profitability of banks decreases with the increase of competition. In other words, the higher the concentration ratio, the higher will be the profitability of banks, reflecting a positive association between market share of a bank and its performance. In Bangladesh, many scholars argue in the opposite direction to support the competitive market structure. Calem and Carlino (1991) point out that a market with higher concentration is more vulnerable to crisis; and thereby is less competent and equitable. Berger et al. (2004) mention that government intention to restrict competition through foreign bank entry regulation and state ownership of banks generates adverse effect and ultimate poor economic efficiency in a country. Furthermore, it is highly likely that banks in a concentrated atmosphere can engage in non-competitive deeds to generate higher revenue with lower benefits for consumers (Abbasogluet al., 2007; Wong et al., 2008); thus, produce monopoly and corresponding inefficiencies (Suzuki et al., 2008). Importantly, arguments highlighting the possible benefits of competitive market actually emerge from the application of the standard industrial organization economics to the financial sector, particularly the banking sector. Moreover, these arguments show their inclination towards the alternative hypothesis of the SCP, that is, the ES which states that enhanced performance of banks leads to higher market share which in turn results into market concentration associated with superior efficiency. That is, bank-specific efficiency difference in a particular market leads to uneven proportion of market size and corresponding high intensity of concentration. In fact, this hypothesis does not consider market concentration as a random event; instead, it is the result of greater efficiency of the dominant banks (Smirlock, 1985). This is possible because a bank with either superior management or production technology in a competitive market can lower cost to increase profit and to attain higher market share (Berger, 1995). On the other hand, a bank with higher efficiency than its competitors can also maximise profit either by maintaining the current market size and pricing policies or by accommodating size expansion and price reduction strategies (Lloyd-Williams et al., 1994, p.437). It means that banks under such a market mechanism strive for achieving dual objectives of maximizing profits and minimizing costs and prices, and as a consequence, the highest amount of credit will be allocated (Northcott, 2004). Therefore, according to the ES hypothesis, profitability of banks greatly depends upon the efficiency rather than the market structure of the banking sector. In this way, the emergence of the ES not only challenges the traditional SCP hypothesis but also puts forward an alternative way of analyzing the different dynamics of the banking sector. Studies of Demsetz (1973), Brozen (1982), Samad (2008) and Seelanatha (2010) support the ES hypothesis. Therefore, based on the literature reviewed above, it can be argued that the nature of the relationship between competition and bank performance is rather ambiguous. According to Wanniarachchige and Suzuki (2010), the relationship is country-specific in nature and as such they suggest to conduct more studies at country level. Focusing on the findings of earlier studies, concentrating on the banking sector of Bangladesh such as Samad (2008), the impact of competition on bank performance in the form of profitability and efficiency cannot be generalized since the results derived from pool and annual data portray different results. Because of this anomaly, he urges for further studies to explore the impact of changing market structure on bank performance. With regard to the development of models for assessing the impact of competition, previous studies concentrating on developing countries adopt bank-specific, industry/ country-specific, or a combination of both types of variables. For instance, Wanniarachchige and Suzuki (2010) use industry/country-specific variables only, whereas Ataullah and Le (2006) and Samad (2008) use both variables for their studies. This study also adopts similar approaches for selecting the necessary variables in the regression 4.1 COMPETITION AND PROFITABILITY The structure-conduct-performance (SCP) hypothesis from traditional industrial organization theory states that a firm’s performance is determined by its business strategy which is influenced by industry structure [3]. Furthermore, the SCP hypothesis posits that because of collusion and domination, firms earn higher profits in a concentrated market than in a competitive market. In other words, there is a positive relationship between market concentration and firm profitability [4]. With respect to the banking industry, existing literature provides lots of empirical supports for the SCP hypothesis. Bhatti and Hussain test the SCP hypothesis in the context of Pakistan’s banking industry and their result supports the SCP hypothesis [5]. Kamau and Were investigate the driving factors of bank performance in Kenya during 1997–2011 and find that the source of superior performance is structure/collusive power [6]. Uddin and Suzuki empirically assess a negative relationship between competition and profitability by using banking sector data from Bangladesh [7]. Tan and Floors investigate the relationship among market concentration, profitability, and risk-taking in the Chinese banking industry during the period from 2003 to 2009 and testify a negative relationship between competition and profitability [8]. 4.2 COMPETITION AND RISK-TAKING A standard view of banking supervision is that competition is detrimental to bank stability. On the one hand, competition erodes a bank’s franchise value which is equivalent to the cost of bankruptcy and encourages bank to pursue risky policies, such as lowering capital levels and softening the terms of loans, which increase nonperforming loans and result in credit risk [9]. On the other hand, a bank will select safe policies, which contribute to the stability of the entire banking system, to protect its franchise value when the market competition is restrained [10]. Another view argues that banks’ policies influence the behavior of borrowers, which in turn change bank risk-taking [11]. Specifically, restrained competition results in a high borrowing cost (i.e., interest rates being charged on loans), which possibly raise the credit risk of borrowers due to moral hazard issues [12]. For example, because of the information asymmetries in the credit business, borrowers can conceal their credit condition and payback ability, while banks are always at a disadvantage with respect to acquiring sufficient borrower information. Martinez-Miera and Repullo propose a model to illustrate the effect of competition on bank risk-taking and find that two effects working in opposite directions generate an unclear net effect on risk-taking and that the intensities of these two effects vary with the level of competition [13]. 4.3 COMPETITION AND INNOVATION The relationship between market competition and innovation is a primary focus of industrial organization theory. Schumpeter first states that market competition discourages innovation by diminishing monopoly rents and large firms are able to afford more capital for innovation activities [14]. On the contrary, some researchers assert that the Schumpeter hypothesis is not comprehensive and that there are more incentive factors in a competitive market than in a monopoly market [15]. Increased competition encourages innovation activities because firms in a competitive market attempt to escape competition and obtain monopoly profits [16]. Against al. propose a theoretical model and confirm that two effects vary with competition and produce opposing results; thus the net effect of competition on innovation is unclear [17]. 4.4 INNOVATION AND PROFITABILITY The efficiency hypothesis (EH) posits that the bank profitability depends on the bank’s degree of efficiency, whereas the bank’s degree of efficiency is affected by its financial innovation activities [18]. That is to say, innovation improves bank technology, which then increases bank efficiency and enhances bank profitability. Moreover, Allen et al. find that improving a bank’s technology enhances its quality of assets [19]. In addition, financial innovation generates new forms of bank products, such as Internet banking, mobile banking, telephone banking, ATMs, and POS networks, which provide relative high returns and low cost advantages that enhance bank profitability [20–22]. 4.5 INNOVATION AND RISK-TAKING Chen states that a bank’s innovation activities improve the efficiency of the screening and monitoring borrowers and eventually reduce the quantity of nonperforming loans and the bank’s credit risk [23]. Schaeck and Cihák propose that great efficiency will translate into reduced likelihood of bank default and enhanced stability [24]. However, Norden et al. claim that whether innovation is beneficial or not depends on why and how it is used by banks [25]. If innovation is employed to improve risk measurement and control, such as the screening and monitoring borrowers, it contributes to bank stability. However, if the innovation supported by banks is mainly for the purpose of achieving high profits, it encourages banks’ risk-taking behaviors and leads to bank failure. Hou et al. find a positive relationship between technical efficiency and risk-taking behaviors of Chinese commercial banks [26]. 4.6 RISK-TAKING AND PROFITABILITY The capital asset pricing model (CAPM) provides the first coherent framework for interpreting how the risk of an investment affects its expected return and depicts that the expected return is calculated by adding the risk free interest rate to the product of the investment’s beta and the expected market risk premium [27]. The investment’s beta is always positive; thus there is a positive relationship between market risk and expected return. A commercial bank must manage its assets through investments, and, in this sense, the bank can be perceived as an investor. Given that the risk appetites of bank managers determine the level of bank risk-taking, if most of a bank’s managers are risk seekers, they will be willing to make risky decisions to obtain high returns. In other words, there is a positive relationship between bank risk-taking and profitability [28]. 5. METHODOLOGY 5.1 Research Design: The methodology adopted involved the conduct of interviews, preparation of questionnaires and their administration. The research used mix methods, incorporating both qualitative and quantitative data gathering methods. Qualitative research because it is based on holistic approach to science and is explained in terms of variables and units of analysis. Both explanatory research and descriptive research were used in accomplishing the objectives of the study. The explanatory research was again used to gain insight into the impact Risk and profitability in banking sector of Bangladesh. 5.2 Sources of Data: In order to prepare a comprehensive and authentic research the author used both primary and secondary sources of data. • Primary Sources of Data although the project is primarily based on primary sources of information, the only such source of information for this research are gathered from the bank. • Secondary Sources of Data The secondary sources of information include the materials like different publication, report, and articles given to the author to understand different bank in Bangladesh. 5.3 Secondary Data: Secondary data is the data that have been already collected by and readily available from other sources. Such data are cheaper and more quickly obtainable than the primary data and also may be available when primary data cannot be obtained at all. This data refers to data that has been collected previously for the purpose of other studies in the past by researchers. Evaluation of secondary data is more about critically analyzing work which has already b |
