The Relationship between SME Financing and Bank Growth: A

Study on the State-Owned Commercial Banks of Bangladesh.

0
 University of Dhaka

MBA Thesis Report on

“The Relationship between SME Financing and Bank Growth: A Study on the
State-Owned Commercial Banks of Bangladesh.”
Date of Submission: June 06, 2024 (Thursday)
Submitted To:
Department of Banking and Insurance
University of Dhaka.
Supervised By:
Dr. Sadia Noor Khan, madam.
Associate Professor
Department of Banking and Insurance
University of Dhaka.

Submitted By:
Name: Md. Anwar Hossen
Class Roll: 1513, Section: Banking, Batch: 24th
Department of Banking and Insurance
University of Dhaka.

1
 Letter of Transmittal

Dr. Sadia Noor Khan

Associate Professor

Department of Banking and Insurance

University of Dhaka

Subject: Submission of thesis report title for “The Relationship between SME Financing and Bank
Growth: A Study on the State-Owned Commercial Banks of Bangladesh”.

Madam,

I'm very glad to submit my thesis report on “The Relationship between SME Financing and
Bank Growth: A Study on the State-Owned Commercial Banks of Bangladesh” which you
assigned me as a necessary component for the program. In this report, I have tried to analyze the
relationship between SME Financing and Bank Growth. I have tried to make the report a
comprehensive one within the given time. It was truly a big opportunity for me to gather a lot of
knowledge and properly understand the topic. This report presents all of the material with the
utmost integrity and sincerity. I found the analysis fascinating, relevant, and informative, and I did
my best to create this report that was credible and factual.

Finally, I would like to express my gratitude for all of your guidance and advice when I was writing
this report. I genuinely hope that this report will meet your approval and consider it fair and
effective. I shall be very grateful if you are kind enough to agree and share your insightful opinion
on this report.

Yours Sincerely,

…………………………………………………………

Md. Anwar Hossen

ID: 1513, MBA 24th Batch, Section: Banking

Department of Banking and Insurance

University of Dhaka.

2
 Supervisor’s Certificate

This certifies that, in partial fulfilment of the requirements for the Masters of Business
Administration (MBA) degree from the Department of Banking and Insurance, University of
Dhaka, Md. Anwar Hossen has completed the report on "The Relationship between SME
Financing and Bank Growth: A Study on the State-Owned Commercial Banks of Bangladesh."
The report was written with my oversight and direction. He has made every effort to complete this
study effectively. I hope he has more success and wealth in the future.

………………………………………………

Signature of The Supervisor

Dr. Sadia Noor Khan

Associate Professor

Department of Banking and Insurance

University of Dhaka.

3
 Student’s Declaration

I thus affirm that the dissertations titled "The Relationship between SME Financing and Bank
Growth: A Study on the State-Owned Commercial Banks of Bangladesh" have been submitted in
complete conformity with the requirements of the MBA Program at the University of Dhaka. I
therefore declare that this dissertation is completely my work. This study does not include any
content that has been plagiarized from prior sources. No segment of the investigation was
presented for any alternative academic qualification or affiliation, and the research findings were
not disseminated in any scholarly publication or periodical. I have only submitted my original
work to the University of Dhaka as the exclusive institution.

I further agree to hold the Department safe from any loss or harm resulting from my failure to
uphold the foregoing commitments.

…………………………………………….

Md. Anwar Hossen

ID: 1513, MBA 24th Batch, Section: Banking

Department of Banking and Insurance

University of Dhaka.

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 Acknowledgement

All praises belong to Almighty Allah, who gave humans the crown of creation and gifted them
with knowledge and understanding. I would like to express my sincere gratitude to the All-
Powerful Allah for giving me the strength and the courage to complete the report. I want to express
my cordial thanks to everyone who encouraged and helped me with the writing of this report. I am
extremely grateful to my Supervisor, Dr. Sadia Noor Khan, Associate Professor, Department of
Banking and Insurance, University of Dhaka for assigning me this report. Her proper guidance,
support, and timely feedback helped me to bring out the best possible outcome in the preparation
of this report. Additionally, I also appreciate those who voluntarily assisted in providing me with
the pertinent financial information that required compiling this report. It would not have been
possible for me to carry this out without their assistance.

Finally, I wish to express my deepest thanks to the Department of Banking and Insurance Authority
for organizing this program for students. Before entering the banking industry, it prepares students
to handle official obligations.

…………………………………………….

Md. Anwar Hossen

ID: 1513, MBA 24th Batch, Section: Banking

Department of Banking and Insurance

University of Dhaka.

5
Executive Summary

The economic development of the banking industry overall is greatly influenced by small and
medium-sized enterprises (SMEs). Examining the relationship between SME lending and bank
growth, this study will concentrate on Bangladesh's state-owned banks. To examine the impact of
small and medium-sized firm (SME) lending on the growth and profitability of state-owned banks,
secondary data covering selected dependent, independent, and control variables from 2013 to 2022
will be used. It does this using a theoretically supported panel data regression analysis. The study
found some significant relationship between SME financing and banks' growth in terms of
profitability. Using profitability as the dependent variable and SME financing along with other
control variables were analysed. As a result, the data analysis results showed some promising
relationships between the main subjects of this report. Four different regression models were used
for the analysis. Simple OLS, Fixed Effect, Random Effect, and GLS models were conducted. The
analysis also included diagnostic tests of these regression models. Some of the models suffered
from Autocorrelation, Heteroscedasticity, and Omitted Variable Bias. The study underscores the
importance of SME financing for economic development, highlights the role of state-owned banks
in facilitating SME growth, and offers valuable recommendations to enhance the efficiency and
sustainability of SME financing mechanisms in Bangladesh. This study will give insights into the
future activities of the state-owned banks for sustaining SME growth in Bangladesh. This paper
contributes to scholarly debates and conducts empirical research on the relationship between bank
growth and small and medium-sized firm (SME) investment, therefore filling a gap in the
evidence. The results are important for Bangladesh's inclusive and long-term economic
development. The study stands noteworthy because there is a lack of literature on bank growth and
small and medium-sized firm (SME) funding.

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Table of Contents

Chapter 1: Introduction ............................................................................................................. 10

1.1 Background of Study .............................................................................................................. 10

1.2 Rationale of the Study ............................................................................................................. 11

1.3 Aim of the Study ...................................................................................................................... 11

1.4 Objectives of the Study............................................................................................................ 11

Chapter 2: Literature Review & Development of Hypothesis ................................................ 12

2.1 Introduction............................................................................................................................. 12

2.2 SME Financing and Bank Growth .......................................................................................... 12

Chapter 3: Methodology……………………………………………………………………...16

3.1 Introduction………………………………………………………………………………….16

3.2 Data Collection ....................................................................................................................... 16

3.3 Data Analysis Method............................................................................................................. 17

3.4 Research Strategy ................................................................................................................... 19

3.5 Ethical Considerations ............................................................................................................ 21

3.6 Conclusion .............................................................................................................................. 21

Chapter 4: Findings, Analysis, and Discussion ........................................................................ 22

4.1 Trend Analysis: ....................................................................................................................... 22

4.2 Regression Analysis ................................................................................................................ 36

4.3 Diagnostic Tests ...................................................................................................................... 43

4.4 Correlation Matrix .................................................................................................................. 47

4.5 Critical Analysis……………………………………………………………………………..47

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Chapter 5: Conclusion ................................................................................................................ 48

5.1 Findings .................................................................................................................................. 48

5.2 Recommendations………………………………………………………………………….48

5.3 Conclusion…………………………………………………………………………………49

Reference ..................................................................................................................................... 50

Appendix...................................................................................................................................... 52

Table of Figures

Figure 1: Net Interest Margin Ratio ............................................................................................. 22

Figure 2: Return on Assets (ROA) ............................................................................................... 23
Figure 3: Return on Equity Ratio ................................................................................................. 24
Figure 4: NPL Ratio ..................................................................................................................... 25
Figure 5: Capital Adequacy Ratio ................................................................................................ 26
Figure 6: Debt to Equity Ratio ..................................................................................................... 27
Figure 7: Leverage Ratio.............................................................................................................. 28
Figure 8: SME Financing Ratio ................................................................................................... 29
Figure 9: Management Efficiency Ratio ...................................................................................... 30
Figure 10: Income Diversification Ratio ..................................................................................... 31
Figure 11: Financial Intermediation Ratio ................................................................................... 32
Figure 12: Bank Size .................................................................................................................... 33
Figure 13: GDP Growth Rate ....................................................................................................... 34
Figure 14: Inflation Rate .............................................................................................................. 35

Table 1: Variable Identification .................................................................................................... 17

Table 2: ANOVA Test ................................................................................................................... 36
Table 3: Co-efficient Table for ROA Model................................................................................. 37
Table 4: Co-efficient Table for ROE Model ................................................................................. 40
Table 5: Co-efficient Table for NIM Model ................................................................................. 41
Table 6: Multicollinearity Test ..................................................................................................... 43
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Table 7: Heteroskedasticity Test ................................................................................................... 44
Table 8: Autocorrelation Test ....................................................................................................... 45
Table 9: Omitted Variables Test ................................................................................................... 45
Table 10: Correlation Matrix ........................................................................................................ 46
Table 11: Target of SME Credit Disbursement ............................................................................ 47

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Chapter 1: Introduction

1.1 Background of the Study

Bangladesh is a nation well-known for its vibrant financial industry and vibrant entrepreneurial
landscape, and it offers a case study of the connection between small and medium business (SME)
credit and bank development. The bank's goal in Bangladesh is to offer top-notch banking products
and services that will support increased trade and commerce, industrialization, job creation for
youth, poverty reduction, and the maintenance of the nation's progress, so promoting economic,
social, and political prosperity. Banks typically provide four categories of loans: consumer,
industrial, commercial, and small and medium-sized company (SME) loans (Moulick, 2020).

According to Jacobs et al. (2010), SMEs play a major part in promoting economic growth, and
structural transformation, reducing poverty and hunger, and general development. Bangladesh is
one of the developing countries that mostly depends on small and medium-sized companies
(SMEs) to propel economic development (Moulick, 2020). In Bangladesh, small and medium-
sized enterprises (SMEs) make up almost all firms, except those engaged in agriculture
(Chowdhury et al., 2013).

Being significant players in the banking industry, state-owned banks are essential in shaping
financial policy and promoting economic growth via the financing of small and medium-sized
companies (SMEs). Analyzing the advantageous cooperation between state-owned banks and
small and medium-sized companies (SMEs) offers important insights into the workings of these
institutions and has broader effects on economic development. Small and medium-sized firms
(SMEs) for instance got 15,508 crore BDT in financing in 2017 from state-owned commercial
banks (Khalil et al,2022). The intricate relationship between SME lending and bank growth is
examined in this study, which focuses on Bangladesh's state-owned banks. Examining the inner
operations of state-owned banks (SNBs) and small and medium-sized companies (SMEs) might
help one better grasp how these institutions are interconnected and how this affects economic
development more broadly.

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1.2 The rationale of the Study

Small and medium-sized firms (SMEs) are essential to the economy's growth overall, employment
creation, and innovation promotion. This sector is well recognized as a major force behind
economic growth, significantly advancing technology, creating jobs, and improving general
economic conditions. This importance is why Bangladesh has implemented several government
initiatives to promote the expansion of SMEs and increase their access to finance. Given their
significant financing source, state-owned banks might be very helpful to this sector. There are thus
many compelling reasons to examine the connection between Bangladesh's state-owned banks and
the funding of small and medium-sized companies (SMEs). The performance of Bangladesh's
state-owned banks is correlated with the situation of the nation's economy. Although it is well
acknowledged that SMEs are essential to both economic and social development, they are having
trouble obtaining the capital they need (Moulick, 2020). Policymakers, banking regulators, and
other interested parties may find this study to help understand the possibilities and limitations state-
owned banks have when supporting SMEs. Moreover, a closer look at how state-owned banks
support small and medium-sized firms (SMEs) might help to better comprehend strategies to
increase financial inclusion and promote the growth of underdeveloped economic sectors.

1.3 Aim of the Study

This paper attempts to provide a comprehensive analysis of the relationship between small and
medium-sized company (SME) loans and bank growth using Bangladesh's state-owned banks as a
case study.

1.4 Objectives of the Study

• To understand small and medium-sized company financing in the banking industry.

• To pinpoint the factors influencing Bangladesh's state-owned banks' profitability (growth).
• To examine the link, using several factors including SME lending, between Bangladesh's state-
owned banks and their profitability (growth).

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Chapter 2: Literature Review & Development of Hypothesis

2.1 Introduction

Much research has gone into small and medium-sized business (SME) financial assistance and
how it impacts banks' growth rates. It was hard to decide what to include in the early phases of the
research. I have located and carefully read all relevant material on the subject.

2.2 SME Financing and Bank Growth

Given their huge influence on GDP growth, innovative product development, and job possibilities,
small and medium-sized enterprises (SMEs) constitute the backbone of every economy. The cash
that small and medium-sized businesses (SMEs) need to prosper and grow is mostly supplied by
banks. The connection between bank development and SME finance is a very significant and
fascinating topic in both academic study and policy discussion, claim Osotimehin et al. (2012).
Researchers, decision-makers, and business people now find it increasingly important to
comprehend the mechanics and consequences of SME financing for the growth and stability of
banks.

2.3 Literature Review on SME Financing and Bank Performance

Akhtar, S., & Rahman, M. (2020) in their article "Challenges and Opportunities of SME
Financing in Bangladesh: A Study on Banking Sector" explored the challenges and opportunities
of SME financing in Bangladesh from the perspective of the banking sector. It examined how
banks have responded to the changing demands of SMEs with creative products, services, and
delivery strategies. This study examined how well financial innovation can simplify SMEs'
financing processes, cut transaction costs, and increase loan availability.

Islam, S., & Ahmed, R. (2020) in the article "Financial Innovation and SME Financing: A
Comparative Study of Bangladesh Banking Sector" compared financial innovation initiatives in
the banking sector and their implications for SME financing in Bangladesh. It looked at the moral
dilemmas with Islamic banking, risk-sharing regulations, and Sharia-compliant funding methods.

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Small and medium-sized firms (SMEs) had their Islamic financing alternatives evaluated taking
into account their viability, accessibility, and effect on bank growth and stability.

Ali, M., & Hasan, A. (2020) in the article "Islamic Banking and SME Financing: A Comparative
Study of Bangladesh" compared the practices of Islamic banking institutions in SME financing
with conventional banks in Bangladesh.

Hossain, M. (2020) in the article "Macroeconomic Determinants of Bank Credit: Evidence from
Bangladesh," looked at the general economic variables affecting bank lending in Bangladesh. It
looked at things like GDP growth, currency rates, and inflation rates to find out what the main
factors influencing bank lending practices. The study provided actual data on the relationship
between macroeconomic factors and the supply and demand for bank loans. “Challenges and
Opportunities of SME Financing in Bangladesh: A Study on Banking Sector" assessed the
viewpoint of the banking industry on the potential and challenges of financing small and medium-
sized enterprises (SMEs) in Bangladesh. It looked at how several elements, including credit risk
management, market pressures, legal limitations, and collateral requirements, affect small and
medium-sized business lending. The survey also revealed tactics and best practices to assist banks
go beyond obstacles and successfully meet the funding needs of SMEs.

Kabiraj, S., & Sarker, R. (2019) in their article “Regulatory Reforms and Performance of
Commercial Banks in Bangladesh: An Empirical Investigation" investigated the effects of
regulatory reforms on the performance of commercial banks in Bangladesh. Finding out how
regulatory changes affect the stability and profitability of commercial banks; it examined actual
data. These adjustments might have to do with risk management techniques, loan terms, or capital
needs.

Rahman, M., & Hossain, M. (2019) in their article "Determinants of Bank Profitability: Evidence
from Bangladesh Banking Sector" investigated the determinants of bank profitability in
Bangladesh, with a focus on SME financing activities. Among the factors looked at to determine
the main causes of bank profitability were interest margins, the quality of the loan portfolio,
operational effectiveness, and capital sufficiency. The study examined how SME lending affected
banks' general stability and health.

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Rahman, M., & Hossain, M. (2018) in their article "Access to Finance for SMEs in Bangladesh:
What Matters?" examines the factors influencing access to finance for SMEs in Bangladesh. look
at the factors affecting Bangladeshi small and medium-sized companies' (SMEs') ability to get
financing. Examined were elements like interest rates, collateral needs, and legal limitations that
small and medium-sized businesses (SMEs) run into when trying to get bank funding. The report
also included several policy suggestions to facilitate SMEs' access to funding.

Khan, M. A., & Uddin, M. J. (2018) in their article "Role of Financial Institutions in SME
Financing: Evidence from Bangladesh" examined the role of financial institutions, including
banks, in SME financing in Bangladesh. The research looked at the elements that affect the
products and services that banks provide as well as how they lend to small and medium-sized
businesses (SMEs). The study looked at SME funding from the standpoint of financial institutions,
pointing out both possibilities and constraints.

Ahmed, S., & Rahman, M. (2018) in the article "The Impact of SME Financing on Bank
Performance: Evidence from Bangladesh" examined the impact of SME financing activities on the
performance and growth of banks in Bangladesh. The impact of SME financing on the bank's
performance was evaluated using metrics including profitability, non-performing loans, interest
income, and loan portfolio composition. Examined in connection with bank lending to small and
medium-sized enterprises (SMEs) were three key areas: risk management, capital sufficiency, and
financial stability.

Rahman, M. (2017) in his article "Determinants of SME Financing and Its Impact on Economic
Growth in Bangladesh" explored the factors influencing SME financing in Bangladesh and
examines how SME financing impacts economic growth in the country. To learn what influences
financing for small and medium-sized firms (SMEs) and how this affects general economic
development, it examined variables like interest rates, loan approval rates, and government
restrictions.

Hasan, M., & Rahman, M. (2017) in the article "Bank-SME Relationship and Its Impact on Firm
Performance: Evidence from Bangladesh" explored the relationship between banks and SMEs in

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Bangladesh and its impact on SME firm performance. A bank examined a variety of factors,
including loan periods, interest rates, collateral requirements, and relationship banking procedures,
to ascertain how successfully it supported small firms. The study also looked at the relationships
between finance availability and bank support to the growth, profitability, and sustainability of
SMEs.

Ahmed, S., & Islam, S. (2015) in his article "Banking Sector Development and Economic Growth
in Bangladesh: A Time Series Analysis” explored the relationship between the development of the
banking sector in Bangladesh and its impact on economic growth. Tracking trends over time, it
examined factors like GDP growth, investment patterns, and bank lending to determine the
banking industry's overall contribution to economic development.

Beck et al., (2008) stated in their article that SMEs play a vital role in driving economic
development and fostering entrepreneurship. Through the promotion of fresh concepts, more just
money distribution, and employment creation, they increase output and competitiveness generally.
SMEs struggle to get sufficient funding, nevertheless, due to issues like erratic data, collateral
requirements, and lenders' risk judgments. Eliminating these funding constraints is essential to
promoting fair economic development and releasing the full growth potential of SMEs.

Berger and Udell (2006) stated in their journal that Banks serve as primary providers of financial
services to SMEs, offering a range of products and solutions tailored to their specific needs. For
several services, including working capital, loans, trade finance, and advice, small and medium-
sized firms (SMEs) mostly depend on banks. For their part, banks gain from lending to SMEs via
fee-based services, client relationships, and interest income. Given their mutually beneficial
relationship, banks and SMEs should be aware of how financing dynamics affect their expansion
and productivity. The study provided an extensive understanding of SME finance and bank
performance based on the literature assessment. Still needed, however, is a greater study on how
state-owned commercial banks may improve their performance when lending to SMEs. In
Bangladesh, there have emerged many successful private commercial banks. All the same, this

15
study will examine the relationship between the funding of SMEs and the expansion of state-
owned commercial banks.

Null hypothesis (H0): The profitability (growth) of state-owned banks in Bangladesh is

unaffected by SME lending or other factors.

Alternative Hypothesis (H1): The expansion and profitability of state-owned banks in

Bangladesh are influenced by various factors, including lending to SMEs.

Chapter 3: Methodology

3.1 Introduction

The approaches of this research are divided into the following parts. Here I will describe the data-
collecting procedure and the analysis of the obtained data. This will provide a suitable justification
for the scope and approaches to achieving the goals of the research.

3.2 Data Collection

Secondary Data: Here I have collected data from five state-controlled commercial banks' financial
statements. I gathered panel statistics from the official sources of each bank as further information

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and used these figures to our findings. Relative data values are used in this work for debt to equity,
bank size, leverage, return on assets, income diversification, financial intermediation, capital need,
and other pertinent measures. These factors are linked to the banks engaged and were assembled
especially for this study. I collected the data values not only from main sources but also from
secondary ones, including the Bangladesh Bank website. The GDP and inflation rates taken from
these secondary sources have been utilized as market-specific factors.

3.3 Data Analysis Method

Quantitative data analysis: Numbers used in quantitative data analysis include statistics,
percentages, computations, and measures. I will use a multiple linear regression model to evaluate
the influence of several market- and bank-specific factors. The regression model used in this study
will be comparable to the functional model shown above.

YROA it =α it + β2, SME it + β3, CAR it + β4, ME it + β5, ID it + β6, FI it + β7, BS it + β8,
NPL it + β9, LEV it + β10, DE it + β11, Inf it + β12, GDP it + €it
YROE it =α it + β2, SME it + β3, CAR it + β4, ME it + β5, ID it + β6, FI it + β7, BS it + β8,
NPL it + β9, LEV it + β10, DE it + β11, Inf it + β12, GDP it + €it
YNIM it =α it + β2, SME it + β3, CAR it + β4, ME it + β5, ID it + β6, FI it + β7, BS it + β8,
NPL it + β9, LEV it + β10, DE it + β11, Inf it + β12, GDP it + €it

Using this regression model, I have regressed the ROA, ROE, and NIM in comparison with
multiple independent factors. These are expressed below-
Table 1: Variable Identification

Dependent Variable

Banks specific Symbol Formula Description

variables
Return on Assets ROA Net Income/ Average This measures a company's profitability
Total Assets by evaluating how efficiently it utilizes its
assets to generate profit.

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Return on Equity ROE Net Income/ This measures a company's profitability
Shareholders′ Equity by evaluating how effectively it generates
profit from the shareholders' equity
invested in the company
Net Interest NIM (Interest Income – This measures the difference between the
Margin Interest Expense)/ interest income generated by a bank or
Average Interest- financial institution and the interest
Earning Assets expenses paid out to depositors and

Independent Variable creditors, relative to its interest-earning

Banks specific Symbol Formula assets

Description
variables
SME Financing SME Financing for SMEs/ The proportion of financing or credit that
Total financing small and medium-sized enterprises
receive from financial institutions or other
sources compared to their total financing
needs.

Capital CAR Bank's capital/Risk How much capital a bank has in relation to

Adequacy Ratio weighted assets. its risk-weighted assets and current

obligations is known as the Capital
Adequacy Ratio (CAR).
Management ME Management This measures the ability of the

efficiency efficiency= Earning management to utilize its resources for

asset/Total asset generating the profit.

Income ID Income Income diversification relates to the

diversification diversification = Non proportion of the non-interest income to

interest income/total total income. This measures ability to
income absorb the shock of depleting main income
sources.

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 Financial FI Financial A concept known as "Financial
intermediation intermediation = Total Intermediation" is employed in national
loan/total deposit accounts to measure the role that banks
play as go-betweens for depositors and
borrowers.
Bank size BS Logarithm of total This is a measure to reflect the total asset
asset size of the banks.
Non-performing NPL NPL /Total loans Nonperforming bank loans have a value
Loan Ratio equal to the proportion of total gross loans
that the bank is unable to recoup.
Leverage Lev Leverage= Total One measure of a company's level of

liabilities/total asset financial leverage is the ratio of its total

debt to its total assets.
Debt to equity DE Debt to equity= Total D/E displays how much of a company's
debt/ total equity financing originates from debt or equity. A
greater D/E ratio suggests a corporation
has more debt than equity.
Macroeconomic Variables
Inflation Inf Annual rate Inflation is a widespread price increase in
an economy.
Gross Domestic GDP Annual rate GDP is the market worth of all completed
Product Growth products and services produced in a
Rate country at a given period.

3.4 Research Strategy

The method of choice in this research is experimentation. This study approach aims to provide a
comprehensive method to look at the relationship between SME finance and bank development.
This relationship is being investigated within the context of financial markets and economic
development to get a better understanding of its dynamics, mechanisms, and effects. Extensive
research is conducted with the use of the general empirical technique and an experimental
methodology. Carefully examining processes and occurrences is made possible in a controlled

19
setting. Every experiment has a single variable that is altered while the other variables remain
identical. In the experiment, the inclusion of other variables functioned as an independent variable.
Examples of dependent variables changing as a result of an independent variable include the
Return on Assets, Return on Equity, and Net Interest Margin.

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3.5 Ethical Considerations

Exposing the investigation's findings calls for an ethical framework. I avoided utilizing any
immoral methods, including manipulation or plagiarism, to provide a compelling study. I take care
to ensure that the data I gather, examine, and report is private, covert, and compliant with all moral
standards. I also acknowledged the limitations, conflicts of interest, and potential biases in my
research. Future reports will combine data to prevent unwanted access to individual data points.
The only one with access to the spreadsheet and its password will be the investigator.

3.6 Conclusion

A quick review of the methodology section will reveal that a quantitative approach will be used in
this investigation. Using an experimental method may make evaluation and hypothesis testing
much easier. For this data set, I will be relying on secondary sources. I will analyse and evaluate
the data I collect for this particular category using analytic tools. The researcher ultimately
considers and responds to all ethical considerations.

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Chapter 4: Findings, Analysis and Discussion

4.1 Trend Analysis:

1. Net Interest Margin: The Net Interest Margin (NIM) of financial institutions is the difference
between the interest revenue from interest-earning assets (such as loans and investments) and the
interest costs from interest-bearing obligations (such as deposits and borrowings). Usually shown
as a percentage, the net interest margin (NIM) is a gauge of a bank's profitability in its main lending
and investment activities. In essence, as it indicates that interest revenue is exceeding interest
expenditures, a higher net interest margin (NIM) is a positive indicator of sound financial health
for financial institutions.

Net Interest Margin

6.00%

4.00%

2.00%

0.00%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
-2.00%

-4.00%

-6.00%

-8.00%
Agrani Bank BDBL Sonali Bank Janata Bank Rupali Bank

Figure 1: Net Interest Margin Ratio

We can see from the chart that in the earlier five years, Agrani Bank and BDBL Bank had higher
positive NIM ratios, on the contrary in some years, other banks also faced a negative percentage
of NIM ratios. In 2020 and 2021 years, there we can see that almost all the banks had lower or
negative percentage of NIM ratio as the banks went through a pandemic session. Recently the
banks have been in a good position, and have a positive NIM ratio.

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2. Return on Assets:

Considering a company's return on assets (ROA) is one approach to assessing its financial health.
To get it, divide net income by the average total assets of the company. A percentage representing
the efficiency of asset use inside a corporation is called the return on assets (ROA). Less effective
use of assets may be indicated by a lower return on assets (ROA), whereas higher ROA indicates
more efficiency in generating profits from its assets. Return on assets (ROA) is one key indicator
that analysts and investors use to evaluate a company's performance.

Return on Assets (ROA)

2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
-0.50%
-1.00%
-1.50%
Agrani Bank BDBL Sonali Bank Janata Bank Rupali Bank

Figure 2: Return on Assets (ROA)

From this chart, we can see that in 2013, the ROA of Agrani Bank and Janata Bank had a higher
percentage than the others. But in 2016, we can the negative ROA percentage of Agrani Bank and
Rupali Bank shows their negative net income conditions. Overall, recently last five years, these
State-owned banks had a lower percentage of ROA, which shows their operational inefficiency
and increased cost of capital.

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3. Return on Equity:
A corporation's return on equity (ROE), which contrasts the amount of stock owned by
shareholders with the net income produced by the company, is one financial measure of its
performance. Usually expressed as a percentage, it is calculated by dividing net income by average
shareholders' equity. Examining return on equity (ROE) might help one better grasp profitability.
A lower return on equity (ROE) indicates better utilization of equity capital; a higher ROE
indicates more efficiency in providing returns for shareholders. Return on equity (ROE) is a vital
performance indicator used by analysts and investors to assess a company's management
effectiveness and financial success.

Return on Equity (ROE)

30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
-5.00% 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
-10.00%
-15.00%
-20.00%
-25.00%
Agrani Bank BDBL Sonali Bank Janata Bank Rupali Bank

Figure 3: Return on Equity Ratio

Here we can see from the chart that in 2013, the ROE of Agrani Bank was the highest with 25.39%
and the others have also a decent percentage of ROE. But in 2016 and 2017 there were opposite
scenarios of the ROE of Agrani Bank as you can see in 2016, the ROE was negative (19.06%), on
the contrary in 2017 the ROE was oppositely positive (16.59%). Over the last five years, the banks
had a positive ROE, which was quite good.

24
4. NPL Ratio:
The non-performing loan ratio is one financial measure that shows what percentage of a bank's
loans are not generating income because interest or principal are not being paid. A proportion is
stated as a ratio of non-performing loans to all loans granted by the bank, divided by all loans
issued, and then multiplied by 100. With a higher nonperforming loan ratio, the bank runs more
risk and may experience financial hardship.

Non Performing Loan Ratio

40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2015 2016 2017 2018 2019 2020 2021 2022
Agrani Bank BDBL Sonali Bank Janata Bank Rupali Bank

Figure 4: NPL Ratio

From the bar chart, we can show the NPL ratio of the banks, where we see that during the early
years 2013-2018, the portion of NPL of BDBL bank and Sonali bank was much higher, after
onwards, we can see the higher percentage in Janata bank. All the banks have the higher proportion
of NPL ratio which is over 10%. There are some reasons behind the higher percentage – The
problem started a long time ago when some companies borrowed money from state-owned banks
but did not pay it back. However, the banks continued to issue loans to these companies. There is
no appetite to enforce repayment of their loans. There is also an issue of poor corporate governance
of these state-owned banks.

25
5. Capital Adequacy Ratio:
The assessment of an organization's financial stability and ability to withstand potential losses is
conducted through the utilization of the Capital Adequacy Ratio (CAR). As a percentage, it is a
ratio that assesses the stability of a financial institution through a comparison of its equity and
specific types of debt to its risk-weighted assets. The total risk-weighted assets are typically
divided by the qualifying capital of the bank. A bank with a high Capital Adequacy Ratio possesses
sufficient funds to endure economic downturns and other unanticipated losses. In order to ensure
the solvency of financial institutions, minimum capital adequacy standards are frequently
established by regulatory agencies.

Capital Adequacy Ratio (CAR)

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Agrani Bank BDBL Sonali Bank Janata Bank Rupali Bank

Figure 5: Capital Adequacy Ratio

Over the last 10 years, the percentage of CAR of the BDBL bank was higher than the others, which
means that the bank had a greater buffer against financial risks and economic downturns or
unexpected losses. One reason can be stated of the higher percentage of BDBL bank is that it is a
newcomer in the banking sector with a tenure of only 12 years. Rupali Bank had a Lower CAR
percentage compared to the other four banks.

26
6. Debt to Equity Ratio:
The debt-to-equity ratio is one way to figure out how much financial leverage a company has. It
can be found by dividing a company's total debts by the value of its shares.

Debt to Equity Ratio

45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Agrani Bank BDBL Sonali Bank Janata Bank Rupali Bank

Figure 6: Debt to Equity Ratio

The debt-to-equity ratio is a financial metric used to evaluate a company's financial leverage. It is
calculated by dividing the total liabilities of a company by its shareholders' equity. Based on the
graph it can be seen that all the banks have maintained debt to equity ratio consistently except
Rupali Bank PLC. Although the ratio of Rupali Bank PLC fell in 2015, 2016, and 2017, their D/E
became the highest from 2018 to 2022 among the five banks.

27
7. Leverage Ratio:
One measure of a company's debt-to-equity ratio is its leverage ratio. Financial risk is assessed in
part by demonstrating the percentage of a company's funding that comes from debt. Greater
dependency on debt, which may increase earnings but also increase financial vulnerability, is
indicated by a higher ratio. High-leverage ratio businesses may find it harder to pay their debts
during recessions or other challenging economic periods.

Leverage Ratio
120.00%
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Agrani Bank BDBL Sonali Bank Janata Bank Rupali Bank

Figure 7: Leverage Ratio

From the chart, it is shown that the leverage ratio of Agrani Bank, Sonali Bank and Rupali Bank
is much higher over the last 10 years which indicates that the banks have a greater proportion of
debt relative to equity in their capital structure. While higher leverage can amplify returns on
equity, it also increases financial risk. BDBL bank was compared to a lower percentage of leverage
ratio which shows quite good condition for the bank.

28
8. SME Financing:
In conversations regarding the acquisition of capital by small and medium-sized enterprises
(SMEs) for establishment, expansion, or investment, the phrase "SME financing" is occasionally
applied synonymously.

SME Financing
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Agrani Bank BDBL Sonali Bank Janata Bank Rupali Bank

Figure 8: SME Financing Ratio

According to the graph, it is stated that Agrani Bank PLC prefers to finance in the SME sector
mostly. Although their ratio was highest in 2013 and 2014, their SME financing became lower
from the next year. Still, Agrani Bank PLC maintains the highest ratio in the last year. The other
four banks are in a stable position. Three banks have increased their SME financing in last three
years.

29
9. Management Efficiency Ratio:
A management efficiency ratio is one kind of financial ratio that gauges how well management
handles working capital and other resources of the business. This indicator of the performance
development of the State-owned bank indicates its ability to employ its working capital and other
resources.

Management Efficiency Ratio

90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Agrani Bank BDBL Sonali Bank Janata Bank Rupali Bank

Figure 9: Management Efficiency Ratio

The management efficiency ratio is calculated by dividing earning assets by total assets. This
indicates how management efficiently increased their earning assets using total assets. From the
graph it is shown that maximum bank’s efficiency ratio is in the stable position from 70-80%. The
ratio of the Agrani Bank PLC fluctuated in different years but was in a good position in the last
year.

30
10. Income Diversification Ratio:
The Income Diversification Ratio is a financial measure that evaluates the degree to which a firm
generates its income from a range of sources or business divisions. It aids in quantifying the degree
of diversity in a company's revenue sources, which may serve as an indication of its ability to
withstand market swings and mitigate risks linked to reliance on a single revenue stream.

Income Diversification Ratio

80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Agrani Bank BDBL Sonali Bank Janata Bank Rupali Bank

Figure 10: Income Diversification Ratio

The graph shows that the income diversification ratio of the five banks differs from each other.
Among the five banks, Janata Bank PLC stays always in the top position in case of income
diversification.

31
11. Financial Intermediation Ratio:
The financial intermediation ratio is a measure of the total amount of loans compared to the total
amount of deposits. It is a metric used to evaluate the proficiency and efficacy of financial
intermediaries in enabling the transfer of cash between individuals who save money and those who
borrow money within an economy.

Financial Intermediation Ratio

100.00%

80.00%

60.00%

40.00%

20.00%

0.00%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Agrani Bank BDBL Sonali Bank Janata Bank Rupali Bank

Figure 11: Financial Intermediation Ratio

The ratio of the maximum banks according to the graph stays in stable position every year. Among
the five banks, BDBL is on the highest and Sonali Bank PLC is on the lowest position over the
last ten years.

32
12. Bank Size
Bank size is the total assets of every bank. The size of a bank can have significant implications for
its operations, risk profile, regulatory requirements, and impact on the financial system.

Bank Size
2000000000000

1500000000000

1000000000000

500000000000

0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Agrani Bank PLC. Bangladesh Development Bank PLC.
Sonali Bank PLC. Janata Bank PLC.
Rupali Bank PLC.

Figure 12: Bank Size

Among the five banks, bank size fluctuates a little every year. BDBL and Sonali Bank have been
at the top of the graph over the last 10 years. While Janata Bank has a comparatively lower bank
size.

33
13. Gross Domestic Product (GDP) Growth Rate:

GDP is the market worth of all completed products and services produced in a country at a given
period. The GDP growth affects the overall market economy at large.

GDP
9.00%
7.90%
8.00% 7.30% 7.20%
7.10% 6.90%
7.00% 6.60% 6.60%
6.00% 6.10%
6.00%
5.00%
4.00% 3.40%
3.00%
2.00%
1.00%
0.00%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Figure 13: GDP Growth Rate

Banks play a crucial role in the economy, and their activities have a significant impact on GDP
growth and economic development. According to the graph, the highest GDP rate was 7.90% in
2019 and the lowest rate was 3.40% in 2020. COVID 19 effect can be the reason for this
unexpected fall in 2020.

34
14. Inflation Rate:
The rate at which prices rise over a specified period is known as inflation. Usually, inflation is
measured broadly, as in the case of a country's cost of living increase or general price increase. It
shows the increase in the price of the relevant set of goods or services over a given time frame,
usually a year. This factor affects the market interest rate and the overall economy at large.

Inflation
9.00%
8.00% 7.53% 7.70%
6.99%
7.00%
6.19%
6.00% 5.51% 5.70% 5.54% 5.59% 5.69% 5.55%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Figure 14: Inflation Rate

According to the graph, it can be seen that the lowest inflation rate was 5.51% in 2016 and the
highest inflation rate was 7.70% in 2022. Although the second-highest rate was in 2013. And this
rate fluctuated from 2014 to 2021. This means that the inflation rate played a significant role in
the economy of Bangladesh. This in terms also affects our observed state-owned commercial
banks.

35
4.2 Regression Analysis

Table 2: ANOVA Test

ROA ROE NIM

Source SS df MS SS df MS SS df MS
of
variation
Model 0.00042 11 0.00004 0.062 11 0.0056 0.0084 11 0.00076
Residual 0.00057 38 0.00002 0.096 38 0.0025 0.0069 38 0.00018
Total 0.00100 49 0.00002 0.158 49 0.0032 0.0152 49 0.00031
ROA ROE NIM
Number of observations 50 50 50
F (11, 13) 2.56 2.24 4.23
Prob > F 0.015 0.033 0.0004
R-squared 0.426 0.393 0.5506
Adjusted R-squared 0.260 0.218 0.4205
Root MSE 0.004 0.050 0.0134

The first table shows the sources of variation found in the test results. Here we can see that the
ROA-based model was the source of the 0.00042 variation while the residual term was the source
of the 0.00057 portion of the variation. The total amount of variation that the test results were able
to capture was about 0.00100. Again, we can see that the ROE-based model was the source of
0.062 variations while the residual term was the source of 0.096 portions of the variation. The total
amount of variation that the test results were able to capture was about 0.158. Lastly, we can see
that the model was the source of the 0.0084 variations while the residual term was the source of
the 0.0069 portions of the variation. The total amount of variation that the test results were able to
capture was about
0.0152.

In the ANOVA results, we can see that the test statistics produced an F-value of 2.56, 2.24, and
4.23 for the three models. All the values have a probability of lower than the minimum threshold

36
of 0.05 for being the statistically significant value. Taken all together, the dependent variable was
statistically significantly influenced by every independent component.

The goodness-of-fit statistic R-squared is applied to linear regression models. This metric displays
the extent to which the independent factors explain the variance in the dependent variable. The
strength of the relationship between the model and the dependent variable may be easily measured
using R-squared, which uses a linear scale from 0% to 100%. The test result shows that the
independent variables were able to account for 43%, 39%, & 55% of the variability of the
dependent variables respectively for the three models.
The adjusted R-squared indicates that if we continue to add more independent variables the model
will be able to account for 26%, 22%, & 42% of the variability of the dependent variables for the
three models respectively. This is lower than the R-squared value. This means that the additional
input variables are not adding value to the model.
The RMSE is the residuals' standard deviation (prediction errors). Residuals are a measure of the
deviation of the data points from the regression line, and RMSE is a measure of the dispersion of
the residuals. That is to say, it tells us how closely our data lies to the line of best fit. So, the
standard deviation for the model was 0.4%, 5.0%, & 1.3% respectively for the three models.
ROA
Table 3: Co-efficient Table for ROA Model

Variable OLS FE RE GLS

SME .0471* .1024*** .0471* .0471**
Financing
CAR .0896* 0.0615 .0896* .0896**
ME 0.019 0.0046 0.019 0.019
ID -0.002 -.0179* -0.002 -0.002
FI -.0177* -.0269* -.0177* -.0177**
BS -0.001 0.001 -0.001 -0.001
NPL 0.005 0.0188 0.0051 0.0051
LEV -0.004 -.1131* -0.004 -0.004
DE 0.000083 0.000159 0.000083 0.000083

37
 INF .1641* .1957** .1640* .1640**
GDP 0.0312 0.0046 0.031 0.031
_cons -0.0125 0.0449 -0.0125 -0.0125
legend: * p<0.05; ** p<0.01; *** p<0.001
A positive coefficient suggests that a rise in the independent variable typically produces a mean
increase in the dependent variable. A negative coefficient indicates that the dependent variable
generally tends to drop as the independent variable rises. The test results show that ID, FI, BS, and
LEV variables had a negative coefficient. This means that a 1 unit increase of these independent
variables will decrease the dependent variable by the respective coefficient value. The test results
also show SME Financing, CAR, ME, NPL, DE, and GDP variables show a positive coefficient.
This means that a 1 unit increase of these independent variables will increase the dependent
variable by the respective coefficient value.

The test results of the OLS model show that among all the independent variables, only the SME
Financing, CAR, FI, & INF variables were found statistically significant in explaining the
dependent variable ROA. So, it is evident that the profitability is significantly affected by SME
Financing, Capital Adequacy Ratio, Financial Intermediation, & Inflation for the selected state-
owned commercial banks.

The test results of the FE model show that among all the independent variables, only the SME
Financing, ID, FI, LEV, & INF variables were found statistically significant in explaining the
dependent variable ROA. So, it is evident that the profitability is significantly affected by SME
Financing, Income Diversification, Leverage, Financial Intermediation, & Inflation for the
selected state-owned commercial banks.

The test results of the RE model show that among all the independent variables, only the SME
Financing, CAR, FI, & INF variables were found statistically significant in explaining the
dependent variable ROA. So, it is evident that the profitability is significantly affected by SME
Financing, Capital Adequacy Ratio, Financial Intermediation, & Inflation for the selected state-
owned commercial banks.

38
The test results of the GLS model show that among all the independent variables, only the SME
Financing, CAR, FI, & INF variables were found statistically significant in explaining the
dependent variable ROA. So, it is evident that the profitability is significantly affected by SME
Financing, Capital Adequacy Ratio, Financial Intermediation, & Inflation for the selected state-
owned commercial banks. The constant implies that the value of the dependent variable will equal
the constant term if all of the explanatory variables in the model are zero at some point in time.

39
ROE

Table 4: Co-efficient Table for ROE Model

Variable OLS FE RE GLS

SME .6971** 1.246*** .6971** .6971**
Financing
CAR 0.7405 0.3341 0.7405 0.7405
ME .3653* 0.2027 .3653* .3653**
ID -0.0747 -0.2023 -0.0747 -0.0747
FI -0.176 -0.2097 -0.1763 -.1763*
BS -0.0132 0.0162 -0.0132 -0.0132
NPL 0.0721 0.1498 0.0721 0.0721
LEV -0.0618 -1.3288 -0.0618 -0.0618
DE 0.0003 0.0013 0.0003 0.0003
INF 1.9156* 1.919 1.9156* 1.9156*
GDP 0.2839 -0.1279 0.2839 0.2839
_cons -0.1959 0.5435 -0.1959 -0.1959
legend: * p<0.05; ** p<0.01; *** p<0.001
The test results of the OLS model show that among all the independent variables, only the SME
Financing, ME & INF variables were found statistically significant in explaining the dependent
variable ROE. So, it is evident that the profitability is significantly affected by the SME Financing,
Capital Adequacy Ratio, Management Efficiency & Inflation for the selected state-owned
commercial banks.
The test results of the FE model show that among all the independent variables, only the SME
Financing variable was found statistically significant in explaining the dependent variable ROE.
So, it is evident that the profitability is significantly affected by the SME Financing for the selected
state-owned commercial banks. The test results of the RE model show that among all the
independent variables, only the SME Financing, ME & INF variables were found statistically
significant in explaining the dependent variable ROE. So, it is evident that the profitability is
significantly affected by the SME Financing, Capital Adequacy Ratio, Management Efficiency &
Inflation for the selected state-owned commercial banks. The test results of the GLS model show

40
that among all the independent variables, only the SME Financing, ME, FI & INF variables were
found statistically significant in explaining the dependent variable ROE. So, it is evident that the
profitability is significantly affected by SME Financing, Capital Adequacy Ratio, Management
Efficiency, Financial Intermediation & Inflation for the selected state-owned commercial banks.
NIM
Table 5: Co-efficient Table for NIM Model

Variable OLS FE RE GLS

SME -0.03921784 0.00301416 -0.07843568 -0.03921784
Financing
CAR .43764217*** 0.30823374 .43764217*** .43764217***
ME -0.070572 -0.06161666 -0.141144 -0.070572
ID 0.02630769 0.02023089 .02630769 0.02630769
FI 0.02338333 0.02269546 .02338333 0.02338333
BS -.00829582** -0.00226533 -.00829582** -.00829582***
NPL -0.00642638 -0.00039552 -0.01285276 -0.00642638
LEV .04738078** -0.21024162 .04738078** .04738078**
DE 0.00014357 0.0002676 .00014357 0.00014357
INF .63791123* 0.54595786 .63791123** .63791123**
GDP 0.10776759 -0.02852038 .10776759 0.10776759
_cons 0.00422148 0.13761615 .00422148 0.00422148
legend: * p<0.05; ** p<0.01; *** p<0.001
The test results of the OLS model show that among all the independent variables, only the CAR,
BS, Lev & INF variables were found statistically significant in explaining the dependent variable
NIM. So, it is evident that the profitability is significantly affected by the Capital Adequacy Ratio,
Bank Size, Leverage & Inflation for the selected state-owned commercial banks.
The test results of the FE model show that among all the independent variables no variable was
found statistically significant in explaining the dependent variable ROE. So, it is evident that the
profitability is not significantly affected by any variable for the selected state-owned commercial
banks.

41
The test results of the RE model show that among all the independent variables, only the CAR,
BS, Lev & INF variables were found statistically significant in explaining the dependent variable
NIM. So, it is evident that the profitability is significantly affected by the Capital Adequacy Ratio,
Bank Size, Leverage & Inflation for the selected state-owned commercial banks.

The test results of the GLS model show that among all the independent variables, only the CAR,
BS, Lev & INF variables were found statistically significant in explaining the dependent variable
NIM. So, it is evident that the profitability is significantly affected by the Capital Adequacy Ratio,
Bank Size, Leverage & Inflation for the selected state-owned commercial banks.

42
4.3 Diagnostic Tests

Table 6: Multicollinearity Test

ROA ROE NIM

Variable VIF 1/VIF VIF 1/VIF VIF 1/VIF
BS 18.52 0.05 18.52 0.05 18.52 0.05
CAR 15.88 0.06 15.88 0.06 15.88 0.06
LEV 8.6 0.12 8.6 0.12 8.6 0.12
SME Financing 4.82 0.21 4.82 0.21 4.82 0.21
ME 4.14 0.24 4.14 0.24 4.14 0.24
FI 3.74 0.27 3.74 0.27 3.74 0.27
ID 2.79 0.36 2.79 0.36 2.79 0.36
DE 2.52 0.40 2.52 0.40 2.52 0.40
NPL 1.86 0.54 1.86 0.54 1.86 0.54
INF 1.15 0.87 1.15 0.87 1.15 0.87
GDP 1.11 0.90 1.11 0.90 1.11 0.90
Mean VIF 5.92 5.92 5.92

Significant intercorrelations between two or several independent factors in multiple regression

analysis are referred to as multicollinearity. Whenever a study or analyzer tries to figure out how
thoroughly any explanatory relevant factors can be utilized to anticipate or comprehend the relying
parameter in a statistical theory, multicollinearity may produce biased or deceptive conclusions
(Bayman, 2021). Multicollinearity is a concern since it reduces the individual variable's analytical
relevance. The independent variable VIF of 5 or above specifies that there is a multicollinearity
problem with the independent variable and the mean VIF of 5 or above indicates that the model is
suffering from a multicollinearity problem.

Our independent variables' regressed VIF values are displayed in the table above, and they reveal
that a considerable portion of our independent variables, such as SME Financing, ME, FI, ID, DE,
NPL, INF, & GDP do not have multicollinearity issues because their VIF value is less than 5. The
independent variables that have multicollinearity problems are BS, CAR, &LEV. The VIF for bank

43
size is 18.52 which is more than 5 and it reveals that it has intercorrelation with another
independent variable. Capital Adequacy Ratio, & Leverage encounters the same issue since the
VIF of Capital Adequacy Ratio is 15.88, & 8.6 respectively.

The mean VIF of our model is 5.92 which indicates the entire model is jointly suffering from
multicollinearity problems.

Table 7: Heteroskedasticity Test

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: fitted values of Variables: fitted values of Variables: fitted values of
ROA ROE NIM
chi2(1) = 7.23 chi2(1) = 0.58 chi2(1) = 5.01
Prob > chi2 = 0.0072 Prob > chi2 = 0.4458 Prob > chi2 = 0.0252

Whenever a forecasted variable's degrees of separation are not constant when observed throughout
a range of independent parameter readings or at earlier time intervals, this is known as
heteroskedasticity or heteroscedasticity. When a regression model's residual term, or standard
error, has a large range of variability, the situation is said to be heteroscedastic. Based on the
heteroskedasticity test, null hypothesis, H0, constant variance is taken and if the data set has a
constant variance, there is no heteroskedasticity problem. However, when the data set has rejected
the null hypothesis, H0, it states that the data set has non-constant error variance which results in
a heteroskedasticity problem.

In the ROA and NIM-based model, the calculated chi-square p-values are 0.0072 & 0.0252 which
is less than 0.05. Therefore, as heteroskedasticity test standards the null hypothesis, H0, of constant
variance is rejected which signifies that there is heteroskedasticity problem in the model. The
bank's variance over time is not constant which implies that there is sudden shift in the variance.

In the ROE based model, the calculated chi-square p-value is 0.4458 which is greater than 0.05.
Therefore, as heteroskedasticity test standards the null hypothesis, H0, of constant variance is
accepted which signifies that there is no heteroskedasticity problem in the model. The bank's
variance over time is constant which implies that there is no sudden shift in the variance.

44
Table 8: Autocorrelation Test

Wooldridge test for autocorrelation in panel data

H0: no first-order autocorrelation

ROA ROE NIM

F (1, 4) = 0.538 F (1, 4) = 0.027 F (1, 4) = 0.301

Prob > F = 0.504 Prob > F = 0.88 Prob > F = 0.61

The magnitude to which the relevant factors are correlated over two subsequent periods is known
as autocorrelation. It evaluates the relationship between the actual amount of a parameter and its
lagged version in a time series. The assumption made in the traditional linear regression approach
is that while records are collected across time, the disturbance term's consecutive values are
momentarily independent. Autocorrelation, however, is the issue that arises when this premise is
broken. In the Wooldridge test, we take the null hypothesis, H0, as there is no first-order
autocorrelation, and when the null hypothesis is rejected, due to the p-value being less than 0.05,
it is established that there is autocorrelation in the model.

In the Wooldridge test of the three models, the F ratio’s p-values are 0.504, 0.88, & 0.61. In
compliance with the standard value, here null hypothesis, H0, fails to be rejected which signifies
that there is no autocorrelation in the model. It denotes that the variables are independent.

Table 9: Omitted Variables test

Ramsey RESET test using powers of the fitted values

Ho: The Model has no omitted variables
ROA ROE NIM
F (3, 35) = 8.09 F (3, 35) = 2.71 F (3, 35) = 0.72
Prob > F = 0.0003 Prob > F = 0.0597 Prob > F = 0.5456
The Ramsey RESET test helps to detect whether there is any misspecification in the functional
form of the regression model by checking for non-linear relationships that might have been
overlooked in the original specification. It primarily checks whether the functional form of the
regression model is correct. In the Ramsey RESET test, we take the null hypothesis, H0, as the
45
Model has no omitted variables, and when the null hypothesis is rejected, due to the p-value being
less than 0.05, it is established that the model has no omitted variables.

In the Ramsey RESET test of the ROA model, the F ratio’s p-value is 0.0003. In compliance with
the standard value, here null hypothesis, H0, is rejected which signifies that there are omitted
variables in the model. In the test results of the ROE and NIM model, however, the F ratio’s p-
values are 0.0597, &0.5456. In compliance with the standard value, here null hypothesis, H0, fails
to be rejected which signifies that there are no omitted variables in the model.

4.4 Correlation Matrix

This section highlights the squared multiple correlations between different variables. This will give
an idea about the correlation between the variables. A positive correlation indicates a similar
movement in the variables whereas a negative correlation indicates an inverse movement between
the variables.

Table 10: Correlation Matrix

ROA ROE NIM SME CAR ME ID FI BS NPL LEV DE INF GDP

ROA 1 0.81 0.08 0.06 0.19 -0.03 0.07 -0.07 0.02 0.03 -0.16 -0.28 0.15 0.00
ROE 0.81 1 0.05 0.13 -0.07 0.04 -0.07 -0.19 -0.18 -0.10 -0.11 -0.25 0.29 -0.03
NIM 0.08 0.05 1 0.14 0.34 -0.29 0.16 0.19 0.18 0.21 0.02 -0.13 0.22 0.13
SME 0.06 0.13 0.14 1 -0.17 -0.76 -0.23 -0.14 -0.03 -0.25 0.38 0.05 0.07 -0.15
CAR 0.19 -0.07 0.34 -0.17 1 0.15 0.20 0.57 0.86 0.25 -0.11 -0.13 -0.06 0.00
ME -0.03 0.04 -0.29 -0.76 0.15 1 0.15 0.24 0.17 -0.03 -0.23 0.18 0.11 -0.01
ID 0.07 -0.07 0.16 -0.23 0.20 0.15 1 0.52 -0.09 -0.24 -0.75 -0.11 0.06 -0.01
FI -0.07 -0.19 0.19 -0.14 0.57 0.24 0.52 1 0.45 -0.04 -0.42 0.21 0.13 0.05
BS 0.02 -0.18 0.18 -0.03 0.86 0.17 -0.09 0.45 1 0.24 0.31 0.19 -0.03 -0.01
NPL 0.03 -0.10 0.21 -0.25 0.25 -0.03 -0.24 -0.04 0.24 1 0.25 -0.09 0.01 0.11
LEV -0.16 -0.11 0.02 0.38 -0.11 -0.23 -0.75 -0.42 0.31 0.25 1 0.38 -0.01 -0.03
DE -0.28 -0.25 -0.13 0.05 -0.13 0.18 -0.11 0.21 0.19 -0.09 0.38 1 0.08 -0.04
INF 0.15 0.29 0.22 0.07 -0.06 0.11 0.06 0.13 -0.03 0.01 -0.01 0.08 1 -0.05
GDP 0.00 -0.03 0.13 -0.15 0.00 -0.01 -0.01 0.05 -0.01 0.11 -0.03 -0.04 -0.05 1

46
Here, both positive and negative correlations can be observed among the dependent and
independent variables.

4.5 Critical analysis

From our analysis, we can identify that SME financing has some clear and significant impact in
the profitability of state-owned banks in terms of ROA and ROE. From our limited observation it
is quite evident that SME financing is a profitable sector for the state-owned banks. But still, this
sector is not in focus as much as other sectors.
Table 11: Target of SME Credit Disbursement

Serial No. Banks & Financial Institutions Target (Tk.

in crore)
1 State-owned Commercial Banks 3,897
2 Specialized Banks 600
3 Private Commercial Banks 17,478
4 Foreign Commercial Banks 707
5 Non-Bank Financial Institutions 1,313
Grand Total: 23,995
Source: SME & Special Programmes Department, Bangladesh Bank

Published by the Bangladesh Bank, the Small and Medium Enterprise (SME) loan Policies &
Programs highlight how state-owned commercial banks have not reached their intended levels of
SME loan disbursement. Therefore, more attention on this industry will help to raise the impact of
SME lending on the growth of State-Owned Commercial banks.

47
Chapter 5: Conclusion

5.1. Findings

It is interesting to observe that the conditions for the expansion of small businesses remain
somewhat comparable to those of a few decades ago, even as we approach total globalization.
Small and medium-sized businesses are formally termed a "throw sector" by the Ministry of
Industries because of their significance in promoting social and economic development. Despite
the criticism and neglect small and medium-sized businesses (SMEs) have faced, their larger
geographical dispersion, lower demand for imported inputs, and dependence on labor-intensive
manufacturing processes are beginning to attract some attention. Conversely, larger companies are
known for their better utilization of resources and higher efficiency. From the developed to the
underdeveloped, commercial banks play a vital and always shifting role in economies all over.

5.2 Recommendations

Here are some suggestions for how state-owned banks might better serve small and medium-sized
enterprises (SMEs) and the groups that aim to attract them:

1. Establishing specific funds to help small and medium-sized businesses (SMEs) acquire the
equity capital they require is the first move banks should take in that direction.
2. Banks have to change their mindset and increase the small and medium-sized company funding
limit.
3. There has to be a drop in the interest rate. It is vital to enable small and medium business capital
availability. Based on a ranking system for their well-crafted business plans and feasibility
studies, the government should provide financial incentive programs for small and medium-
sized businesses (SMEs).
4. If banks want to get beyond the collateral constraint, they must relax their collateral criteria.
5. Project financing—an alternative to collateral-based financing-should be the basis for loans to
potential SMEs instead of collateral based on cash flow records from past years.
6. The Stock Exchange Commission (SEC) and other relevant parties, including Bangladesh and
private support organizations, should aggressively encourage venture capital growth as a way
of supporting small and medium-sized firms (SMEs) using suitable rules and monitoring.
48
7. Banks should set up a human resource development and training plan for their personnel and
relevant government bodies to help simplify the financing procedure for small and medium-
sized businesses (SMEs).
8. The relevant organizations of the Chamber of Commerce and Industries should lead projects
aimed at helping small and medium-sized businesses (SMEs) with training and development.
9. Working jointly, the government and Bangladesh Bank should develop a uniform approach and
structure for assessing loan requests from small and medium businesses. Beyond this, when
assessing loans for small and medium businesses, it is important to regularly monitor the
activities of the bank.
10. Small and medium-sized business expansion will not be supported by banks or donor money
on their own. The government and other pertinent organizations should provide many
financing sources for small and medium-sized businesses (SMEs).
11. Government and bank funds might be sufficient for modern technologies.
12. Bangladesh's government should set up an information office, publicize the issue in the media,
and build a special website to provide all the pertinent statistics on small and medium business
financing.
13. The government could impose different rules on goods produced by small and medium-sized
companies (SMEs) to protect home businesses.

5.3 Conclusion
The performance of the SMEs is still below the worldwide average even if the government is in
favor of them. It is thus fair to declare that the study achieved its objectives and fulfilled its
intended function. Small and medium business financing in the banking industry is a subject the
paper covers well. Numerous factors influencing the profitability (growth) of Bangladesh's state-
owned banks were found using statistical research. The impact of small and medium-sized
company (SME) funding on the profitability (expansion) of Bangladesh's state-owned banks is
another issue that could need some attention. Pursuing these objectives, I also took care to ensure
that my findings matched those of the literature review. Accordingly, the null hypothesis "SME
lending and other factors do not affect the profitability (growth) of these banks" may be disproved
as SME lending and other factors have a major impact on Bangladesh's state-owned banks.

49
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Bangladesh: A Study on Banking Sector." 2(5), 91-97.
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Bangladesh." 3(3), 24-26.
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Affecting the Growth of SMEs in Bangladesh: A Structured Equation Modeling Approach.
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in Bangladesh: An Evaluation (Doctoral dissertation, University of Rajshahi)”. 4(6), 245-250.
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15. Rahman, M. (2017). "Determinants of SME Financing and Its Impact on Economic Growth in
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51
Appendix
Collected Data from the Bank's Annual Report

Banks Years ROA ROE NIM SME CAR ME ID FI BS NPL Lev DE Inf GDP
Agrani 2013 0.02 0.25 0.03 0.30 0.10 0.48 0.42 0.52 10.70 0.18 0.92 11.46 0.08 0.06
Agrani 2014 0.00 0.05 0.04 0.23 0.10 0.51 0.44 0.55 10.81 0.17 0.92 11.51 0.07 0.06
Bank
Agrani 2015 0.00 0.01 0.03 0.19 0.10 0.46 0.45 0.49 10.94 0.19 0.92 11.65 0.06 0.07
Bank
Agrani 2016 -.01 -.19 0.03 0.17 0.10 0.47 0.48 0.46 11.04 0.26 0.94 16.05 0.06 0.07
Bank
Agrani 2017 0.01 0.17 0.01 0.18 0.10 0.59 0.11 0.54 11.12 0.18 0.94 15.55 0.06 0.07
Bank
Agrani 2018 0.00 0.02 0.02 0.18 0.10 0.66 0.08 0.58 11.28 0.18 0.95 17.97 0.06 0.07
Bank
Agrani 2019 0.00 0.03 0.01 0.18 0.10 0.62 0.09 0.62 11.36 0.14 0.95 19.13 0.06 0.08
Bank
Agrani 2020 0.00 0.01 0.00 0.18 0.10 0.55 0.12 0.52 11.60 0.13 0.96 25.79 0.06 0.03
Bank
Agrani 2021 0.00 0.03 -.01 0.19 0.08 0.55 0.12 0.59 11.69 0.17 0.97 28.46 0.06 0.07
Bank
Agrani 2022 0.00 0.03 0.00 0.19 0.06 0.68 0.09 0.78 11.65 0.21 0.96 27.18 0.08 0.07
Bank
BDBL
Bank 2013 0.00 0.03 0.04 0.04 0.24 0.78 0.39 0.83 15.93 0.28 0.65 18.07 0.08 0.06
BDBL 2014 0.00 0.03 0.05 0.05 0.24 0.81 0.42 0.86 15.97 0.33 0.65 16.04 0.07 0.06
BDBL 2015 0.00 0.04 0.03 0.05 0.25 0.76 0.47 0.88 17.02 0.34 0.65 15.69 0.06 0.07
BDBL 2016 0.01 0.03 0.01 0.05 0.26 0.73 0.48 0.85 17.10 0.30 0.66 18.82 0.06 0.07
BDBL 2017 0.01 0.02 0.01 0.06 0.26 0.70 0.28 0.82 17.12 0.27 0.68 20.49 0.06 0.07
BDBL 2018 0.01 0.04 0.04 0.06 0.27 0.69 0.51 0.68 18.17 0.24 0.68 19.63 0.06 0.07
BDBL 2019 0.00 0.00 0.02 0.05 0.22 0.73 0.36 0.82 18.18 0.13 0.69 22.30 0.06 0.08
BDBL 2020 0.00 0.00 -.01 0.16 0.23 0.76 0.41 0.87 19.20 0.12 0.78 20.58 0.06 0.03
BDBL 2021 0.00 0.00 -.01 0.15 0.23 0.79 0.46 0.83 19.23 0.12 0.75 23.24 0.06 0.07
BDBL 2022 0.00 0.01 0.01 0.10 0.23 0.80 0.52 0.85 19.25 0.11 0.75 23.04 0.08 0.07
Sonali 2013 0.00 0.07 0.00 0.03 0.08 0.79 0.20 0.50 11.93 0.30 0.94 16.04 0.08 0.06
Sonali 2014 0.01 0.10 0.00 0.04 0.12 0.79 0.18 0.43 11.97 0.26 0.94 14.69 0.07 0.06
Bank
Sonali 2015 0.00 0.01 -.01 0.04 0.10 0.80 0.14 0.40 12.02 0.25 0.93 13.49 0.06 0.07
Bank
Sonali 2016 0.00 0.02 0.00 0.05 0.10 0.78 0.13 0.37 12.08 0.27 0.94 16.82 0.06 0.07
Bank
Sonali 2017 0.01 0.11 0.01 0.04 0.10 0.76 0.17 0.40 12.10 0.35 0.95 18.02 0.06 0.07
Bank
Sonali 2018 0.00 0.03 -.01 0.04 0.10 0.71 0.14 0.42 12.12 0.26 0.95 17.63 0.06 0.07
Bank
Sonali 2019 0.00 0.04 0.00 0.04 0.10 0.73 0.17 0.48 12.17 0.20 0.95 20.59 0.06 0.08
Bank
Sonali 2020 0.00 0.04 -.01 0.13 0.10 0.75 0.15 0.46 12.20 0.18 1.00 17.58 0.06 0.03
Bank
Sonali 2021 0.00 0.04 -.01 0.11 0.10 0.78 0.16 0.51 12.23 0.17 0.96 21.24 0.06 0.07
Bank
Sonali 2022 0.00 0.05 0.01 0.10 0.10 0.79 0.18 0.60 12.25 0.15 0.95 21.04 0.08 0.07
Bank
Janata
Bank 2013 0.01 0.11 0.00 0.07 0.10 0.79 0.57 0.60 8.77 0.11 0.09 13.13 0.08 0.06
Janata 2014 0.01 0.10 0.00 0.05 0.10 0.79 0.61 0.62 8.79 0.12 0.09 12.08 0.07 0.06
Bank
Janata 2015 0.01 0.10 0.01 0.06 0.10 0.79 0.62 0.61 8.84 0.04 0.09 10.48 0.06 0.07
Bank
Janata 2016 0.00 0.05 0.00 0.06 0.11 0.78 0.56 0.63 8.89 0.05 0.09 11.86 0.06 0.07
Bank
Janata 2017 0.00 0.05 0.01 0.06 0.10 0.76 0.54 0.71 8.94 0.04 0.09 11.64 0.06 0.07
Bank
Janata 2018 0.00 0.00 0.01 0.06 0.10 0.66 0.51 0.79 8.95 0.20 0.10 11.38 0.06 0.07
Bank
Janata 2019 0.00 0.00 0.01 0.06 0.10 0.69 0.54 0.79 9.02 0.27 0.10 12.75 0.06 0.08
Bank
Janata 2020 0.00 0.00 0.00 0.05 0.10 0.74 0.58 0.73 9.09 0.23 0.14 15.00 0.06 0.03
Bank
Janata 2021 0.00 0.06 -.02 0.05 0.09 0.79 0.72 0.69 9.10 0.18 0.13 25.35 0.06 0.07
Bank
Janata 2022 0.00 0.02 0.01 0.05 0.08 0.74 0.64 0.84 9.11 0.18 0.15 26.84 0.08 0.07
Bank
Bank
52
 Rupali 2013 0.00 0.03 0.02 0.06 0.10 0.75 0.26 0.60 11.33 0.17 0.95 17.49 0.08 0.06
Rupali 2014 0.00 0.03 0.02 0.07 0.09 0.80 0.34 0.56 11.43 0.12 0.94 27.66 0.07 0.06
Bank
Rupali 2015 0.00 0.02 0.01 0.07 0.08 0.73 0.37 0.56 11.48 0.16 0.96 22.65 0.06 0.07
Bank
Rupali 2016 0.00 -0.03 -.06 0.07 0.07 0.76 0.37 0.63 11.52 0.20 0.97 17.29 0.06 0.07
Bank
Rupali 2017 0.00 0.01 0.02 0.07 0.07 0.75 0.34 0.65 11.58 0.22 0.97 17.32 0.06 0.07
Bank
Rupali 2018 0.00 0.01 0.01 0.08 0.10 0.76 0.33 0.64 11.67 0.18 0.96 26.13 0.06 0.07
Bank
Rupali 2019 0.00 0.01 0.02 0.07 0.10 0.76 0.38 0.74 11.70 0.15 0.97 28.46 0.06 0.08
Bank
Rupali 2020 0.00 0.01 0.00 0.09 0.08 0.77 0.42 0.63 11.80 0.12 0.97 33.93 0.06 0.03
Bank
Rupali 2021 0.00 0.02 0.01 0.11 0.06 0.79 0.43 0.66 11.82 0.18 0.97 38.36 0.06 0.07
Bank
Rupali 2022 0.00 0.01 0.01 0.11 0.05 0.75 0.43 0.74 11.84 0.21 0.98 41.01 0.08 0.07
Bank
Bank
Formula Used in the Research

ROA = EBIT/total asset

ROE = Net Income/Shareholders′ Equity

NIM = (Interest Income – Interest Expense)/ Average Interest-Earning Assets

SME = Financing for SMEs/ Total financing

Capital requirement, CAR = Banks Capital / Risk Weighted Asset

Management efficiency = Earning asset/Total asset Earning asset

Income diversification = Non-interest income/total income

Financial intermediation = Total loan/total deposit

Bank size = Logarithm of total asset

NPL = NPL /Total loans

Leverage = Total liabilities/total asset

Debt to equity= Total debt/ total equity

GDP = Annual Rate

Inflation = Annual Rate

53