Literature review
According to Altermatt et al (2022), the financial intermediation theory is one of the most prominent
theories that backs up this study. Banks acquire deposits from individuals and businesses as financial
intermediaries, invest, and distribute money throughout the economy. According to this theory, which
explains the correlation between credit risks and liquidity, banks collapse because of their risky assets.
Credit risks and liquidity are linked and impact each other's stability. The foundation of conventional
intermediation theories is unequal transaction costs and information. They were invented to help
institutions acquire deposits and direct money flow to businesses. Since they exchange financial assets,
financial intermediaries are exposed to financial hazards. When financial brokers produce, sell, trade, or
provide services involving financial assets, they manage and trade risks. Bundling and unbundling of
hazards are the main features of their franchise. The inherent risks of their franchise are not directly
accepted by the middlemen. Third parties get funding or are exposed to certain risks (Gbadebo,
2024).2024).
Model development and explanation were done by Klein (1971). The original model centers on a
monopolistic bank subject to a declining demand for credit and loans and an increasing supply of
deposits. The initial model was created by utilizing the banks' inverse function. The quantity of loans and
deposits served as the model's variable. According to the findings of the original model, the
intermediation profit margin suffers if banks' products are replaced by substitutes in the financial
market (Freixasc, 2022). The Monti Klein model demonstrates the strong and intimate relationship
between the balance sheet items of a bank's assets and liabilities, particularly with regard to deposit
withdrawals and borrower loan defaults. By supporting risky projects with depositor funds on their
balance sheet or by issuing guarantees or credit lines on their off-balance sheet, banks, as financial
brokers, supply economic liquidity (Holmström & Tirole, 2011).
Various studies have shown varied relationships between bank profitability and the variables that might
affect it. Research by Shahzad et al (2023) indicates a statistically significant negative relationship
between profitability and liquidity. However, according to research by Nawaz et al (2023), credit risk
hurts profitability. Economic institutions' risk exposure and the rise in outstanding loans are directly
correlated, which leads to this occurrence. This implies that a considerable number of investors in
commercial banks have seen diminished profits due to these credit losses. The concepts of effective
leadership and the concept of profitability are closely linked. A key factor in increasing profitability is
bank charges. The assumption behind a significant number of research studies is that the cost
component of a traditional microeconomic production function must include an expenditure variable.
Shahzad et al. (2023) and Nawaz et al. (2023), for instance, examine the connection between enhanced
management quality and bank profitability and discover a favorable correlation between the two.
Similar to this, a bank's profitability may be greatly impacted by external control factors like inflation and
interest rates that function as indications of market conditions.
Bank profitability drivers have been researched in a number of nations. For example, Shahzad and
Nawaz (2023) investigated the relationship between improved managerial competence and bank
profitability and find a positive association between the two. In a comparable manner, external control
elements that serve as indicators of market conditions, such as inflation and interest rates, can have a
significant influence on a bank's profitability. Among the criteria unique to each bank are liquidity,
solvency, and cost control. Similarly, inflation, GDP, and currency rates were incorporated as external
, factors. The study revealed that effective cost management or administration leads to higher bank
profitability. One of the external/macroeconomic issues that hurt bank earnings was increased interest
rates. Additionally, it's critical to take into account that inflation has a noticeable impact on banks'
performance. Chantapong (2005) conducted an analysis in another study to determine the variables
impacting the performance of domestic and foreign banks conducting operations in Thailand between
1995 and 2000. According to the analysis, credit exposure consistently decreased for all banks during
times of crisis. Furthermore, there was a later shift in focus towards increasing bank profits once the
situation was resolved. Foreign banks were found to be more profitable than local financial institutions
on average when the profitability of domestic and foreign banks was compared. The financial success of
these two bank types did not, however, differ much in the years after the financial crisis ended.
By applying the CAMEL assessment methodology, Kumari (2017) discovered that foreign banks
outperform other banks in capital adequacy and earnings. Banks' liquidity, earnings, capital adequacy,
and asset quality have all been examined in the CAMEL model. Mustafa & Taqi (2017) used the CAMEL
model and ratio analysis to examine Punjab National Bank's financial performance. As the results of the
research reflected, the Punjab National Bank had the possibility to enact the laws and regulations that
were provided by the government to the benefit of the social and economic development of India. The
Punjab National Bank has not performed badly as far as growth and financial efficiency are concerned
within the course of the research. PNB contributes a lot to the nation in relation to the setting up of new
deposit as well as advance plans. The findings of study also illustrated that the profitability of PNB is
closely affected by the number of deposits and transfer the company offers to its clients.
Nuhiu et al. (2017) survey examined the determinants of the economic sustainability of commercial
banks by examining the financial performance indicators in Kosovo. In their results, they implied that
profitability in Kosovo banking is largely dominated by numerous factors. This means that anything to do
with the management processes within the bank level matters in terms of determining the profitability
of commercial banks. The finding was also presented that the quality of assets, cost management and
liquidity of financial interests can be improved resulting in the improved performance of commercial
banking in Kosovo. In coordination with this research study, the quality of the assets and good asset
management have been identified as two main factors that mainly constitute the financial performance
of the commercial banks in Kosovo. This lower profitability is attributed to higher capital status and
liquidity of the commercial banks in Kosovo.
Hawaldar et al. (2017), who studied the financial results analysis of commercial banks in the Kingdom of
Bahrain over the period 2001-2015, within the framework of the financial results analysis of commercial
banks in the Kingdom of Bahrain found that except BDB, a stable trend of the growth of the results in
the form of return on equity and return on assets was shown by retail banks. In terms of the ROA and
ROE, NBB outdid the other chosen banks. KFH had been performing well in Islamic banking as far as
profits are concerned. Also, all the banks were in a good position regarding the risk-asset ratio as the
statistics showed. The test results of the study also pointed out the linkage existing between capital
adequacy and profitability, and the viability and success of commercial financial organizations of the
Kingdom of Bahrain.
Budhedeo & Pandya (2018) explored the financial performance of IDBI Bank in India by examining an
assortment of economic statistics: the CASA ratio and profitability ratios. His research has shown that
the solvency position and the asset employment of IDBI Bank were similar to the industry average.
According to Altermatt et al (2022), the financial intermediation theory is one of the most prominent
theories that backs up this study. Banks acquire deposits from individuals and businesses as financial
intermediaries, invest, and distribute money throughout the economy. According to this theory, which
explains the correlation between credit risks and liquidity, banks collapse because of their risky assets.
Credit risks and liquidity are linked and impact each other's stability. The foundation of conventional
intermediation theories is unequal transaction costs and information. They were invented to help
institutions acquire deposits and direct money flow to businesses. Since they exchange financial assets,
financial intermediaries are exposed to financial hazards. When financial brokers produce, sell, trade, or
provide services involving financial assets, they manage and trade risks. Bundling and unbundling of
hazards are the main features of their franchise. The inherent risks of their franchise are not directly
accepted by the middlemen. Third parties get funding or are exposed to certain risks (Gbadebo,
2024).2024).
Model development and explanation were done by Klein (1971). The original model centers on a
monopolistic bank subject to a declining demand for credit and loans and an increasing supply of
deposits. The initial model was created by utilizing the banks' inverse function. The quantity of loans and
deposits served as the model's variable. According to the findings of the original model, the
intermediation profit margin suffers if banks' products are replaced by substitutes in the financial
market (Freixasc, 2022). The Monti Klein model demonstrates the strong and intimate relationship
between the balance sheet items of a bank's assets and liabilities, particularly with regard to deposit
withdrawals and borrower loan defaults. By supporting risky projects with depositor funds on their
balance sheet or by issuing guarantees or credit lines on their off-balance sheet, banks, as financial
brokers, supply economic liquidity (Holmström & Tirole, 2011).
Various studies have shown varied relationships between bank profitability and the variables that might
affect it. Research by Shahzad et al (2023) indicates a statistically significant negative relationship
between profitability and liquidity. However, according to research by Nawaz et al (2023), credit risk
hurts profitability. Economic institutions' risk exposure and the rise in outstanding loans are directly
correlated, which leads to this occurrence. This implies that a considerable number of investors in
commercial banks have seen diminished profits due to these credit losses. The concepts of effective
leadership and the concept of profitability are closely linked. A key factor in increasing profitability is
bank charges. The assumption behind a significant number of research studies is that the cost
component of a traditional microeconomic production function must include an expenditure variable.
Shahzad et al. (2023) and Nawaz et al. (2023), for instance, examine the connection between enhanced
management quality and bank profitability and discover a favorable correlation between the two.
Similar to this, a bank's profitability may be greatly impacted by external control factors like inflation and
interest rates that function as indications of market conditions.
Bank profitability drivers have been researched in a number of nations. For example, Shahzad and
Nawaz (2023) investigated the relationship between improved managerial competence and bank
profitability and find a positive association between the two. In a comparable manner, external control
elements that serve as indicators of market conditions, such as inflation and interest rates, can have a
significant influence on a bank's profitability. Among the criteria unique to each bank are liquidity,
solvency, and cost control. Similarly, inflation, GDP, and currency rates were incorporated as external
, factors. The study revealed that effective cost management or administration leads to higher bank
profitability. One of the external/macroeconomic issues that hurt bank earnings was increased interest
rates. Additionally, it's critical to take into account that inflation has a noticeable impact on banks'
performance. Chantapong (2005) conducted an analysis in another study to determine the variables
impacting the performance of domestic and foreign banks conducting operations in Thailand between
1995 and 2000. According to the analysis, credit exposure consistently decreased for all banks during
times of crisis. Furthermore, there was a later shift in focus towards increasing bank profits once the
situation was resolved. Foreign banks were found to be more profitable than local financial institutions
on average when the profitability of domestic and foreign banks was compared. The financial success of
these two bank types did not, however, differ much in the years after the financial crisis ended.
By applying the CAMEL assessment methodology, Kumari (2017) discovered that foreign banks
outperform other banks in capital adequacy and earnings. Banks' liquidity, earnings, capital adequacy,
and asset quality have all been examined in the CAMEL model. Mustafa & Taqi (2017) used the CAMEL
model and ratio analysis to examine Punjab National Bank's financial performance. As the results of the
research reflected, the Punjab National Bank had the possibility to enact the laws and regulations that
were provided by the government to the benefit of the social and economic development of India. The
Punjab National Bank has not performed badly as far as growth and financial efficiency are concerned
within the course of the research. PNB contributes a lot to the nation in relation to the setting up of new
deposit as well as advance plans. The findings of study also illustrated that the profitability of PNB is
closely affected by the number of deposits and transfer the company offers to its clients.
Nuhiu et al. (2017) survey examined the determinants of the economic sustainability of commercial
banks by examining the financial performance indicators in Kosovo. In their results, they implied that
profitability in Kosovo banking is largely dominated by numerous factors. This means that anything to do
with the management processes within the bank level matters in terms of determining the profitability
of commercial banks. The finding was also presented that the quality of assets, cost management and
liquidity of financial interests can be improved resulting in the improved performance of commercial
banking in Kosovo. In coordination with this research study, the quality of the assets and good asset
management have been identified as two main factors that mainly constitute the financial performance
of the commercial banks in Kosovo. This lower profitability is attributed to higher capital status and
liquidity of the commercial banks in Kosovo.
Hawaldar et al. (2017), who studied the financial results analysis of commercial banks in the Kingdom of
Bahrain over the period 2001-2015, within the framework of the financial results analysis of commercial
banks in the Kingdom of Bahrain found that except BDB, a stable trend of the growth of the results in
the form of return on equity and return on assets was shown by retail banks. In terms of the ROA and
ROE, NBB outdid the other chosen banks. KFH had been performing well in Islamic banking as far as
profits are concerned. Also, all the banks were in a good position regarding the risk-asset ratio as the
statistics showed. The test results of the study also pointed out the linkage existing between capital
adequacy and profitability, and the viability and success of commercial financial organizations of the
Kingdom of Bahrain.
Budhedeo & Pandya (2018) explored the financial performance of IDBI Bank in India by examining an
assortment of economic statistics: the CASA ratio and profitability ratios. His research has shown that
the solvency position and the asset employment of IDBI Bank were similar to the industry average.
