DOI: https://doi.org/10.3126/nccj.v9i1.

72237

Original Research Article

Bank Specific Factors on the Financial Performance

of Commercial Banks in Nepal
Shanker Dhodary (Ph D scholar)1, & Prem Lal Rajbanshi (Ph D scholar)2
1
Principal Author
Faculty of Management,
Tribhuvan University,
Abstract
Nepal Commerce Campus, Purpose-This study examines the bank specific factors and financial
Kathmandu, Nepal performance of commercial banks in Nepal. The study period of Nepalese
Email: banks’ performance during a period ranging from 2013 to 2023.
[email protected] du.np
Design/methodology/approach- Descriptive research design has been used
2
Corresponding Author in analyzing the performance of commercial banks. Banks’ performance is
Tribhuvan University, measured in terms of ROA, ROE and NIM. Profitability has been taken as the
Nepal Commerce Campus, proxies of performance of banks in this study. Based on the findings of the study.
Kathmandu, Nepal Findings- Nepali commercial banks are performing moderately. They
Email: are not able to increase their performance level significantly. Their
[email protected] performance measured in terms of profitability is not very satisfactory.
However, observing the significant decreased in level of non-performing
Keywords assets, it is concluded that the internal management, credit policy, and
assets quality, Bank size, liquidity business management aspects of the Nepalese commercial banks have
management, management efficiency,
been improving. On the other hand, Nepalese commercial banks are well-
NIM, ROA, ROE.
capitalized and do not have solvency problems. Because of maintaining
JEL Classification Codes: an adequate capital adequacy ratio, they have the capacity to absorb
G20, G21, L25
unexpected losses and safeguard the depositors, investors and creditors.
Original/Value- Few studies have addressed the interplay of microfinance
Online Access
on poverty alleviation in Nepali context.
Paper type- Research paper

Introduction
The good performance of commercial banks rewards investors for their
investments and has critical implications for the growth of the banks in
particular and economic growth of countries in general. On the other hand, the
DOI: poor performance of commercial banks leads to bank failure, eventual crisis
https://doi.org/10.3126/nccj.v9i1.72237 and negative repercussions on economic growth due to contagion effects.
This, therefore, suggests that commercial bank performance is a function of
How to Cite APA Style
a number of factors which could be specific and/or external factors. Mbella
Dhodary, S., & Rajbanshi, P. L. (2024).
and Magloire (2017), the performance of commercial banks has thus been of
Bank Specific Factors on the Financial
great interest to academic research since the great depression of 1929. Bank
Performance of Commercial Banks in
performance refers to how well a bank is doing in providing its products and
Nepal. NCC Journal, 9(1), 19-29
services to customers. The two main aspects of performance include: financial

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International (CC BY-NC 4.0)

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 Bank Specific Factors on the Financial Performance of Commercial...

performance (liquidity, solvency, efficiency and profitability) and market competition. Profitability, efficiency
and risk are the major ones. In the literature, bank performance is usually expressed as a function of internal and
external determinants (Athanasoglou et al., 2005).
There are various factors that affect the profitability of banking sector in any economy. Most studies divide
the determinants of commercial banks performance into two categories, namely internal and external factors
(Khrawish, 2011).
Alam et al., (2011) Commercial banks are an essential part of the financial system without the existence of
whom the smooth and efficient running of business activities encounter challenges and problems. The commercial
banks help in mobilizing savings through a network of branch banking. People in developing countries, like
Nepal, have low incomes but the banks induce them to save by introducing a variety of deposit schemes to suit
the needs of individual depositors.
Banking system is considered as the heart of an economy because of its contribution toward the mobilization
of savings and thus to the utilization of this country’s resources. (Masood et al., 2012) The growth of the economy
depends upon the financial performance of the commercial bank of the country. Financial performance of a bank
depends upon various internal and external factors.
The profitability and overall performance of banks are affected by different factors of the economy. The
factors that affect the commercial bank profitability would be those that affect the banks’ revenue and the costs.
It is important to understand those factors which have effects on banks’ profitability. Therefore, the impact of the
internal and external determinants of commercial bank profitability is analyzed with a view to show their impact
on the banks’ revenue and costs (Pradhan and Shrestha, 2016).
Bank performance is of utmost importance to other stakeholders like depositors, bank managers, and
investors. Hamid and Azmi (2011) state that in a competitive financial market, bank performance provides signals
to depositors and investors alike, on whether to invest or withdraw funds from a bank. The purpose of this study is
to analyze the impact of bank specific variables on the performance of commercial banks of Nepal. Specifically,
it examines the performance of commercial banks through the bank specific variables of capital adequacy ratio,
asset quality, management efficiency, liquidity management, size and credit risk. This study focuses on the impact
of bank-specific variables on the financial performance of commercial banks. Following hypotheses have been
formulated for the study.

Hypothesis:
H0: There is no significant impact of bank specific variables on financial performance of commercial banks.
H1: There is a significant impact of bank specific variables on financial performance of commercial banks.

Literature Review
Financial performance is the process of measuring the results of an organization’s policies and operations in
terms of monetary value. These results are reflected in the firm’s profitability, liquidity or leverage. Evaluating
the financial performance of business allows decision makers to judge the results of business strategies and
activities in objective monetary terms. Normally the ratios are used to determine the financial performance of an
organization. A well designed and implemented financial management is expected to contribute positively to the
creation of a firm’s value (Padachi, 2006). Financial analysis is to analyze the achieved statement to see if the
results meet the objectives of the firm, to identify problems, if any, in the past or present and/or likely to be in the
future, and to provide recommendations to solve the problems (Pradhan, 1986).
Various different researchers and writers have different ideas and definitions about performance. However,
the majority of the researchers have used the term performance to express the range of measurements of transactional
efficiency on input and output efficiency. Hence, financial performance is the process of measuring the results
of an organization’s policies and operations in terms of monetary value. In other words, financial performance
analysis is a study of relationships among the various financial factors and identifying the financial strengths and
weaknesses of the firm by properly establishing the relationship between the items as disclosed by a single set of

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financial statements and a study of the trend of these facts as shown in a series of statements.
Different studies undertaken on the performance of banks suggest that performances of banks are affected
by both internal and external factors. Shaher et al., (2011) studied twenty-three factors that affect the performance,
out of which they have narrowed down the top five factors that affect the performance of banks, which are: banks
characteristic, competition environment, economic indicator, regulation and legal environment and country risk.
The performance of management is also often shown by subjective assessment of management systems,
organizational discipline, control systems, and quality of staff among other factors (Ongore and Kusa, 2013).
Commercial banks that hold a reduced level of liquid assets face the risk of not having the ability to finance their
daily operations. Liquidity is measured using the common financial ratios that show the liquidity position of a
bank. The ratios include customer deposit to total asset, total loan to customer deposits and cash to deposit ratio
(Nyanga, 2012).
Earning ability can be evaluated using a number of accounting ratios namely return on assets, return on
equity, and net interest income margin. The performance of management is also often shown by subjective
assessment of management systems, organizational discipline, control systems, and quality of staff among other
factors (Ongore and Kusa, 2013). Loans comprise the largest portion of a bank’s assets and constitute the greatest
amount of risk to their capital (Nyanga, 2012). Ampaire (2019) researched bank-specific factors on the financial
performance of commercial banks using monthly data for the period 2000- 2019 of Uganda. The study revealed
that higher profitability levels are instigated by higher loans lent to the public at lower interest rates. The more
liquidated the bank is in terms of capital, the more profits they reap in return. The study found out that the ratio of
non-performing loans and profitability have an inverse relationship, the higher the ratio of non-performing loans,
the lower the profitability of the firm’s.

Research Methodology
Research Design
Descriptive research design has been employed in describing the status of bank performance in terms of ROA,
NIM and ROE.

Population and Sample

There are 20 commercial banks operating in Nepal as of mid-July, 2023 (Nepal Rastra Bank, 2020). These 20
commercial banks are defined as the population of this study. The study has taken nine banks as sample by using
stratified random sampling method. Three types of banks such as government owned, domestic private and joint-
venture banks have been selected.

Table 1: List of Sample Banks

S. No. Name of the sample banks Ownership structure Study Period
1 Nabil Bank Limited (NABIL) Joint venture banks 2013 - 2023
2 Standard Chartered Bank Nepal Limited (SCBN) Joint venture banks 2013 - 2023
3 Everest Bank Limited (EBL) Joint venture banks 2013 - 2023
4 Siddhartha Bank Limited (SBL) Private banks 2013 - 2023
5 Sanima Bank Limited (SANIMA) Private banks 2013 – 2023
6 NIC Asia Bank Limited (NICA) Private banks 2013 – 2023
7 Agricultural Development Bank Limited (ADBL) Public banks 2013 – 2023
8 Nepal Bank Limited (NBL) Public banks 2013 – 2023
9 Rastriya Banijya Bank Limited (RBBL) Public banks 2013 – 2023

Nature and Source of Data

This study is based on secondary data. The data has been collected from annual reports of the sample banks. The
bank-specific data were extracted from the annual reports of the sample banks. The study has covered the period
from 2013 to 2023.This study has based on cross-sectional time-series data.

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Models and Variables

The following models have been used to study the impact of bank-specific variables on the financial performance
of commercial banks. According to this model, financial performance is a function of capital adequacy ratio,
management efficiency, asset quality, liquidity ratio, credit risk,
Model 1
ROA=β0+β1CAR+β2AQ+β3ME+β4LM+β5SIZE+β6CR+e…………… (1)

Model 2
ROE=β0+β1CAR+β2AQ+β3ME+β4LM+β5SIZE+β6CR+e…………… (2)

Model 3
NIM= β0+β1CAR+β2AQ+β3ME+β4LM+β5SIZE+β6CR+e………… (3)

Where,
ROA = return on assets
ROE = return on equity
NIM = net interest margin
CAR = the capital adequacy ratio
AQ = asset quality
ME = management efficiency
LM = liquidity management
SIZ = bank size
CR =credit risk measured.
β0 = constant
e= error
β1, β2, β3, β4, β5, and β6 are parameters of the independent variables

Variables used in the study

Dependent Variables
Performance of banks can be evaluated through profitability of the banks. The major indicator of profitability
are ROA and ROE. However, under this study, the ROA, ROE and NIM will be taken as dependent variables to
measure the performance of commercial banks in Nepal. ROA is measured as the percentage of a year’s net profit
to the total assets of the same year. Similarly, ROE is calculated as the percentage of a year’s net profit to the total
equity of the same year. Further, NIM is measured by net interest income divided by total interest earning assets
(Rani & Zergaw, 2017).

Independent Variables
Under this study, the independent variables are bank-specific variables such as capital adequacy, assets quality,
management efficiency, liquidity management, bank size and credit risk.

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Research Framework and Definition of Variables

Figure 3.2. Schematic diagram of theoretical framework.

Operational Definition of Variable

Capital Adequacy Ratio (CAR)
The capital adequacy ratio (CAR) is a measure of a bank’s capital. It is expressed as a percentage of a bank’s risk
weighted credit exposures. Capital is one of the bank specific factors that influence the level of bank profitability.
Capital is the amount of own funds available to support the bank’s business and act as a buffer in case of adverse
situations. Capital adequacy ratio is calculated dividing the capital fund by risk weighted assets. As per the NRB
guideline, commercial banks in Nepal must maintain the capital adequacy ratio above 10 percent.

Capital Adequacy Ratio (CAR) = ×100

Assets Quality (AQ)

Assets Quality represents the degree of financial strength and risks in a bank’s assets, mainly loans and investments.
The non-performing asset to loan and advances ratio has been used in this study as a proxy of asset quality.

Management Efficiency (ME)

Management efficiency means compliance with set norms, ability to plan and respond to changing environment,
leadership and administrative capability of the bank. Such efficiency is reflected in the income-generating capacity
of bank management. Therefore, the efficiency of the management has been measured with the help of operating
income to total assets ratio.

Liquidity Management (LM)

It is of utmost importance for a bank to maintain the correct level of liquidity, which will otherwise lead to
declined earnings. The liquid assets to total assets ratio is used in this study to measure the liquidity of the bank.

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This ratio is arrived at by dividing liquid assets by total assets. The proportion of liquid assets to total assets
indicates the overall liquidity position of the bank.

Size of banks
There are different aspects to measure the size of banks. In this study, size has been measured by taking the natural
logarithm of total assets of banks. The authors point out that, the bigger the bank size, the more difficult it is to
manage it. In contrast, Masood and Ashraf (2012) had found a positive impact of bank size on performance

Credit Risk
Credit risk is the probability that credit capital becomes bad debt. It is the potential that a bank borrower will fail
to meet its obligations under the agreed terms. The credit risk situation of a bank can be exacerbated by inadequate
institutional capacity, inefficient credit guidelines, inefficient board of directors, low capital adequacy ratios and
liquidity, compulsory quota lending because of government interference and lack of proper supervision by the
central bank. Loan loss provisions to total loans ratio is used as a proxy of credit risk in this study.

Results and Discussion

Table 2: Descriptive Statistics
This table shows the results of descriptive statistics of dependent variables and independent variables. Return
on asset, Return on Equity, Net interest margin are dependent variables and Capital adequacy ratio; AQ: Asset
quality; ME: Management efficiency; LQ: Liquidity ratio; SZ: Size, measured in terms of natural logarithm of
total assets; CR: Credit risk are independent variables.
Variables Min Max Mean Median S.D.
Panel A: Performance measurements (dependent variables)
ROA (%) 0.30 3.46 1.78 1.63 0.63
ROE (%) 5.72 42.94 17.81 16.05 6.72
NIM 2.10 8.06 3.60 4.00 1.19
Panel B: Bank specific variables (independent variables)
CAR (%) 2.94 22.99 13.48 13.00 3.44
AQ (%) 0.01 8.98 1.99 1.12 1.95
ME (%) 1.98 6.96 4.47 4.27 1.01
LQ (%) 4.39 39.02 14.92 12.61 6.75
SZ (log) 23.34 26.57 25.33 25.39 0.63
CR (%) 0.45 14.11 2.91 1.93 2.37

Table 4.1 reveals the descriptive statistics for the variables used in this study. It provides details in the form
of maximum, minimum, mean, median and the standard deviation for the dependent variable and its explanatory
variables. Similarly, the results show the descriptive statistics for bank-specific and macroeconomic variables
for the same period. The results reveal that ROA, ROE, and NIM each range between minimum values of 0.30,
5.72, and 2.10, and maximum values of 3.46, 42.94 and 8.06 respectively. It also shows that the mean value of
ROA, ROE, and NIM are 1.78, 17.81 and 4.24 respectively. Mean value tells the central location of observations
and standard deviation describes the variability. The mean value of ROA is 1.78 percentage with a range from
0.30 percentage to 3.46 percentage, indicating that the majority banks have higher performance. The mean value
of ROE is 17.81 percentage with a range from 5.27 percentage to 42.94 percentage, indicating that the majority
banks have higher performance. Likewise, the mean value of NIM is 4.24 percentage with a range from 2.10
percentage to 8.06 percentage, indicating that the majority of firms have average performance in term of NIM.
The results in Table 4.1 also indicate that there is a high variation between the mean values and standard
deviation of both bank-specific and macroeconomic variables for the same period. Bank specific variables have
a mean value of 13.48 percentage for CAR, the ratio of AQ, ME, LQ, SZ, and CR are 1.99 percentage, 4.47
percentage, 14.92 percentage, 25.33 percentage, and 2.91 percentage with standard deviation of 3.44 percentage,

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1.95 percentage, 1.01 percentage, 6.75 percentage, 0.63 percentage, and 2.37 percentage respectively.

Correlation Analysis
This table shows the results of descriptive statistics of dependent variables and independent variables. Return
on asset, Return on Equity, Net interest margin are dependent variables and Capital adequacy ratio; AQ: Asset
quality; ME: Management efficiency; LQ: Liquidity ratio; SZ: Size, measured in terms of natural logarithm of
total assets; CR: Credit risk are independent variables.

Table 3: Correlation Matrix and Multicollinearity Diagnostics

CAR AQ ME LQ SZ CR
CAR 1
AQ -.138 1
ME .279** .337** 1
LQ .214* -.143 .032 1
SZ .034 .088 -.131 -.091 1
CR -.046 .113** .333** -.112 .015 1
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).

As exhibited in Table 4.13, low correlation among explanatory variables, except the correlation between
AQ and CR, indicates no dependency among them, thus indicating a low likelihood of multicollinearity in the
regressions model used in this study.

Results of Model Estimation

To examine the impact of bank-specific and macroeconomic variables on bank performance, the following three
specifications are estimated under Pooled OLS Regression Model.
BPit = α0 + βiXit + ɛit
BPit = α0 + βiXit + λiMACROt + ɛit
BPit = α0 + λiMACROt + ɛit

Where, BP denotes bank performance; Xit and MACROit are the vectors of bank-specific and macroeconomic
variables, respectively. The bank-specific variables include the capital adequacy ratio (CAR), asset quality (AQ),
management efficiency (ME), liquidity (LQ), size (SZ) and credit risk (CR).
Above mentioned models are used to estimate three different scenarios. First, only the bank-specific factors
are included as the explanatory variables. Second, to examine the combined effect of macroeconomic and bank-
specific factors, both bank-specific and macroeconomic variables are included in the model, and finally, only
macroeconomic variables are used in the model. These three scenarios are used for each of three dependent
variables - ROA, ROE and NIM, resulting in nine models.
The results reveal that the adjusted R2 for Model 1 is 0.65767, but they are 0.65935 and 0.04782 in the
cases of Model 2 and 3 respectively. These indicate that about 66 percent of the variability in ROA is explained
by the six bank-specific factors included the Model 1. When macroeconomic variables are also added to the
explanatory variables (in Model 2), nearly 66 percent of the variability of the ROA is explained by bank-specific
and macroeconomic variables together. Further, only about five percent of the variability in ROA is explained
by the two macroeconomic factors included in Model 3. The results also show that the p-values of F-statistic are
significant for all the three models indicating the models are fitted well.

Model 1
Table 4.14 depicts the beta coefficient of AQ, ME, LQ and SZ are positive which indicates a positive influence on
ROA but only the beta coefficient of ME is statistically significant at the one percent level. The beta coefficients

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of CAR and CR are negatives indicating a negative impact on ROA however, they are statistically insignificant.
The results show that the increase in the independent variables AQ, ME, LQ and SZ would increase the ROA of
commercial banks and the decrease in CAR and CR would increase ROA. Except for the beta coefficients of ME,
none of the other variables are found to be significant even at a five percent level of significance.

Model 2
In Model 2, macro-economic variables are also added in the explanatory variables. As shown in Table 4.14 the
beta coefficients of CAR, AQ, ME, LQ SZ are positive which indicates their positive impact on ROA. But as in
Model 1, here in Model 2 also, only the beta coefficient of ME is statistically significant at the one percent level.
As in the first model, the beta coefficient is negative and statistically insignificant for CR indicating a negative
impact on the dependent variable, ROA. According to the results, with the increase in the independent variables,
CAR, AQ, ME, LQ SZ, GDP and INF, the ROA of commercial banks would also increase. Similarly, the ROA
would increase if CR of the banks decreased.

Model 3
The beta coefficients of ME and LQ are positive and significant, indicating a strong positive impact on the
profitability of banks measured in terms of the ROE. The beta coefficient of AQ is also positive but not significant
implying a weak positive influence on the ROE. But, the beta coefficients of CAR and CR are significantly
negative, indicating a strong negative impact on the ROE. SZ has a very weak negative impact on ROE as the
beta coefficient of SZ is statistically insignificant. Thus, with the increase in the AQ, ME, and LQ of commercial
banks, their ROE would also increase. Similarly, the ROE of banks would decrease if their CAR, SZ and CR
increased.

Discussion
Influence on ROA
When only the bank-specific factors are included in the explanatory variables (in Model 1), the capital adequacy
ratio (CAR) influences the level of ROA negatively but not at statistically significantly level. From this result, it
is clear that bank performance tends to increase when capital base of a bank is decreased. This finding contrasts
with finding of the study by Naceur (2003) who have found profitability tend to be associated with banks that hold
relatively high amount of capital. The level of ROA is positively affected by the AQ (measured in terms of a non-
performing asset to loan and advances ratio). This result is not supported by the theory. Also, this result is contrast
with the result of Bilal, Saeed, Gull and Akram (2013) who found that the nonperforming loans to total advances
have a negative significant impact on ROAs. The management efficiency (ME) has the positive and significant
influence on ROA, which indicates that the rise in ME increases the bank performance. This result contrasts with
the result of Jha and Hui (2012). The liquidity (LQ) and size (SZ) have positive influence on the ROA. However,
this influence is statistically not significant. Credit risk (CR) negatively but insignificantly influence ROA of the
commercial banks. This outcome is consistent with Riaz, and Mehar (2013) who have reported that credit risk has
a negative impact on ROA. The size of the bank has a significant positive influence on ROAs and hence, support
the too big to fail theory. And this result is consistent with finding of the study by Jha and Hui (2012), Al-Homaidi
et al. (2018) but contrast with the findings of Karim et al. (2010).
CAR positively but statistically insignificantly influences ROA when macro-economic variables are added
in explanatory variables (Model 2). This is because highly capitalized banks would have a higher long-term
financing capacity and solvency. Similarly, AQ, LQ and SZ also lead to a rise in ROA, but they are too statistically
insignificant. Increase in ME leads to a rise in ROA significantly; on the other hand, decrease in CR leads to
increase in ROA but insignificantly.
When macroeconomic determinates (i.e. economic growth and inflation) are regressed separately excluding
bank-specific variables, GDP show statistically significant positive effect on ROA while INF also shows positive
but insignificant effect on ROA.

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Influence on ROE
Concerning the impact of bank-specific factors on their efficiency, measured in terms of ROE, the results reveal
that CAR, ME, LQ and CR have statistically significant impact on ROE. Among them, CAR and CR have negative
impact and ME and LQ have positive impact. This suggests that maintaining too high capital adequacy affects
negatively the performance of banks in terms of ROE. AQ influence positively but statistically insignificantly to
the ROE of banks. Similarly, SZ have negative but statistically insignificant impact on ROE.
When macroeconomic factors are also included in the regression model, the increase in bank-specific
variables, ME and LQ and macroeconomic variable, INF led to a rise in ROE significantly. On the other hand,
decrease in CAR and CR lead to increase in ROE significantly. AQ, SZ and GDP influence ROE positively but
not at statistically significant level.

Influence on NIM
Among bank-specific factors, only ME significantly impact on NIM, and it makes positive impact. All the
remaining independent variables (CAR, AQ, LQ, SZ, CR) also make positive impact on NIM, but statistically not
significant. The finding that SZ does not influence significantly, is consistent with the finding of Athanasoglou et
al. (2008) who revealed that bank size does not significantly influence a bank’s profitability.

Summary and Conclusion

As the last part of the study report, this chapter presents the summary, conclusions and implications along with
some recommendations for corrective measures to be undertaken by the concerned authorities.

Summary
The banking sector of developing economies like Nepal plays a significant role in the economic acceleration
process of the countries. Therefore, studying the performance of banking sectors of developing nations is of greater
significance. Banks mobilize capital from savers to users. In this process, they perform a wide variety of financial
services - from checking accounts and savings plans to loans for corporations, consumers and governments.
Globally, the banking sector has been experiencing major changes in its operating environment. Domestic as
well as international factors have affected the structure and performance of banks. Banking sector interventions
are expanding rapidly to include investment banking, insurance security, financial planning, advisory services
for mergers and acquisitions, the selling to corporations and customers of risk management services, and various
other creative services. Banks are no longer confined to conventional services; rather they become more and more
general providers of financial services. The traditional method of the services of banks have been changing due
to the changes in technology.
Nepalese banks are also offering their clients a wide range of services by adopting the latest developments
in the international banking sector. Through a joint venture and a strategic alliance with international banks they
bring new technologies and innovations in the banking sector of Nepal. Banking software, E-banking, mobile
banking, debit card, credit card, prepaid card, ATM, etc. are now become common in the Nepalese banking sector.
These technologies have not only increased the efficiency and effectiveness of the banks, but also have saved
significant time of customers.
Despite the increased trend toward bank disintermediation observed in many countries, the role of banks
remains central in financing economic activity in general and different segments of the market in particular. A
sound and profitable banking sector is able to absorb negative shocks and contribute to the stability of the financial
system. Therefore, the determinants of bank performance have attracted the interest of academic research as well
as of bank management, financial markets and bank supervisors.
Bank performance can be measured from different dimensions. Among them, profitability and efficiency
are the major ones. Many studies express bank performance as a function of internal and external determinants.
Bank’s balance sheets and profit and loss account are the major sources from which internal determinants are
derived from. Such determinants of performance are known as bank-specific determinants. External determinants

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are the variables that affect the operation and performance of banks but are not in the control of bank management.
The banking sector plays important role in the economic acceleration of a nation by channeling the funds
from saver units to user units. In this process, the banks facilitate the growth of business by providing capital in
the form of loan. Banks can perform the intermediation function efficiently only when they are financially sound
and profitable. Therefore, it is important to assess their financial performance and to examine the influence of
different variables – bank-specific and macroeconomic - on their performance. It is important to investigate
the determinants associated with success to figure out the actions that can push up the performance of banks.
Stakeholders are also interested to know how banks are performing. Hence, this study focuses on examining the
bank performance in terms of profitability, and in examining the level of the influence of internal and external
factors on the performance of banks.
Bank performance has been measured in terms of return on asset, return on equity and net interest margin.
The key influencing factors of bank performance are considered to be capital adequacy, asset quality, management
efficiency, liquidity, size, credit risk, economic growth, and inflation.
The study used the financial data extracted from annual reports of sampled banks from the year 2013 to 2023.
It covers nine commercial banks that were operating in Nepal during the study period. The study used descriptive
and causal research designs. Descriptive research design has been used in analyzing the performance of commercial
banks. The study used causal research design to measure the influence of bank-specific and macroeconomic
variables on bank performance. Banks’ performance is measured in terms of ROA, ROE and NIM. The key
internal factors influencing bank performance are considered to be capital adequacy, asset quality, management
efficiency, liquidity, size and credit risk. This study has used financial ratios to examine the profitability of the
banks. Financial ratio is used to measure the bank-specific variables also. Regression model has been used to
find the effect of bank-specific variables and macroeconomic variables on bank performance. In general, the
existence of multicollinearity is indicated by a correlation coefficient > 0.7 among two or more predictors. As
the correlation coefficients among explanatory variables of this study are found within the acceptable range, it is
considered the model is free of multicollinearity.
The findings provide evidence that bank level factors have a significant impact on Nepalese commercial
bank profitability over the study period 2013 to 2023. Similarly, macroeconomic factors have also a significant
impact on profitability of banks. The findings call for a number of policy measures for improved competitiveness
of Nepalese commercial banks in the financial intermediation services to the public.

Conclusion
Profitability has been taken as the proxies of performance of banks in this study. Based on the findings of the
study, it is concluded that the Nepalese commercial banks are performing moderately. They are not able to
increase their performance level significantly. Their performance measured in terms of profitability is not very
satisfactory. However, observing the significant decreased in level of non-performing assets, it is concluded that
the internal management, credit policy, and business management aspects of the Nepalese commercial banks have
been improving. As a result, the confidence of investors, depositors and lenders will increase, consequently, the
profitability and credibility of banks will also increase in the future. On the other hand, Nepalese commercial banks
are well-capitalized and do not have solvency problems. Because of maintaining an adequate capital adequacy
ratio, they have the capacity to absorb unexpected losses and safeguard the depositors, investors and creditors. By
reducing the non-performing assets, banks have reduced their credit risk too. The macroeconomic variable, GPD
has been favorable to the banks because on average there had been positive annual growth in GDP. But due to
COVID-19 Pandemic, there is an adverse effect of GDP and inflation in the last two years. NABIL, ADBL and
SCBN are best banks in term of financial performance.
Based on the regression analysis, it is concluded that management efficiency, capital base, credit risk are
the important determinants of the profitability of Nepalese commercial banks. The improvement in management
efficiency would increase the performance of commercial banks measured in terms of ROA and NIM. The growth
in capital base, management efficiency, liquidity and improvement in credit risk would increase the performance

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Bank Specific Factors on the Financial Performance of Commercial...

of commercial banks measured in terms of ROE.

The outcomes of the present study have significant contributions to the existing stock of literature by
comprehensively clarifying and critically analyzing the current state of Nepalese commercial banks’ performance.
More specifically, this study provides evidence of the factors that may affect Nepalese banks’ performance during
a period ranging from 2012 to 2021. During this period, Nepalese commercial banks have witnessed several
challenges such as an earthquake of 2015, an economic blockade imposed by India, liquidity crunches, tremendous
increment made in the capital-base of banks within a short period of time, mergers and acquisitions wave, and
weak corporate governance cases that might have hit some Nepalese banks. This made the investigation of this
topic very important and interesting and provided empirical evidence for bankers and policymakers.

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