Profit maximizing behavior of banks in Bangladesh

A well-developed financial system has been widely understood as a stimulant in accelerating economic growth by easing frictions, mobilizing savings and facilitating investment in an efficient manner (Levine 1997, Rahman 2003). The financial sector reform and its follow-up developments in Bangladesh is an ongoing process. Given the current status of the financial development, this study is intended to frame a testable hypothesis such that inter-group comparisons of marginal productivity of labor and capital of banks in Bangladesh could be tested that would allow us to see if banks in Bangladesh are employing labor and capital efficiently in their profit maximizing behavior. A panel data model - seemingly unrelated regression (SUR) is used based on yearly data covering 2006-2015 for four groups of banks, namely state-owned commercial banks (SCBs), private commercial banks (PCBs), foreign commercial banks (FCBs) and specialized banks (SBs) operating in Bangladesh.The market shares (based on 2006-2015 average figure) in deposits, advances, operating income and total manpower are dominated by the PCBs, while SCBs enjoy the second position followed by FCBs and SBs. Currently 56 scheduled banks are operating in Bangladesh, among them 6 are state-owned commercial banks (SCBs), 2 are specialized banks (SBs), 9 are foreign private banks (FCBs) and 39 are domestic private banks (PCBs) of which 8 are full-pledged Islamic banks. As of end February 2016, the total number of reported bank branches including Head Offices, Islamic Windows and SME service centers stood at 9,410 with 4,072 urban and 5,338 rural branches. Although the central bank of Bangladesh has been monitoring day-to-day development of the banking activities, there is no formal assessment of banking system's profit maximizing behavior has so far been made.This paper also examines if there is any productivity - remuneration gap in labor and capital employment to know if banks in Bangladesh are operating in a competitive environment. The estimated results from Zellner's Seemingly Unrelated Regressions (SUR) procedure indicate that none of the bank groups is employing labor and capital efficiently. Operating earnings elasticities of labor are not significantly different from zero for all groups, while the same are positive for capital. The higher capital intensive banks are making more money than those with lower capital intensity. All of the banks are operating at non-optimal level in a non-competitive environment. They are over-employing labor and under-employing capital relative to the long-run profit maximizing level. The findings of the paper also confirm that there are significant gaps between productivity - remuneration for both the inputs i.e., labor and capital employment in banks of Bangladesh.Therefore, proper policy interventions are needed to enhance competitive environment among banks to ensure efficient and optimal uses of labor and capital. Appropriate policy initiatives to improve managerial efficiency and good governance for the state owned commercial and specialized banks are also recommended.