Review of Literature

REVIEW and Theories

OF LITERATURE on Determinants
AND THEORIES ON
DETERMINANTS OF COMMERCIAL BANK PROFITABILITY
of Commercial Bank Profitability
Dr Devinaga Rasiah
By Dr. Devinaga Rasiah

.
ABSTRACT

Commercial banks have always played an important role in the tremendous economic
development that has taken place in the region over recent years. In the light of these
developments, the objective of this review is to identify the determinants of profitability
of commercial banks.
The determinants of profitability and theories thereof used in this review are those
frequently described in conventional banking studies and literature. The profitability
determinants were basically divided into two main categories, namely the internal
determinants and the external determinants. The internal determinants include
management controllable factors such as liquidity, investment in securities, investment in
subsidiaries, loans, non-performing loans, and overhead expenditure. Other determinants
such as savings, current account deposits, fixed deposits, total capital and capital reserves,
and money supply also play a major role in influencing the profitability.
Similarly, external determinants include those factors which are beyond the control of
management of these institutions such as interest rates, inflation rates, market growth and
market share.

Keywords: Bank profitability; commercial banks; balance sheet;

Correspondence:
Dr Devinaga Rasiah
Faculty of Business and Law,
Multimedia University Melaka
Tel. +116062523346
Email: devinaga.rasiah@mmu.edu.my

INTRODUCTION
The paper starts with a review of the literature on the determinants of commercial
bank profitability. The determinants of bank profitability in its broadest sense were
divided into 3 main parts, the internal and external determinants, the hypotheses
related to the profitability of commercial banks. It is the purpose of this paper to
review the literature that has been written on the various aspects of profitability of
commercial banks.

Review of Literature and Theories on Determinants of Commercial Bank Profitability 23

1