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Keywords

Financial development, ROA, ROE, growth, banking sector

Disciplines

Architecture | Business | Life Sciences | Medicine and Health Sciences

Abstract

This study seeks to examine the impact of financial development on the profitability of banks in Lebanon during the period 1989-2014 using time-series analysis. Different variables were used to measure financial development (the ratio of liquid liabilities to GDP to reflect the financial depth, the ratio of deposit money bank assets to GDP to reflect the size of the banking sector, and the ratio of private credit by deposit money banks and other financial institutions to GDP to measure the banking sector’s activity) and investigate its impact on the Lebanese banking sector’s profits which was measured by return on assets and return on equity. A variety of internal and external banking characteristics were used as control variables to predict profitability. The empirical findings from this study suggest that all the financial development indicators have a statistically significant impact on the Lebanese banking sector’s profitability. In other words, they suggest that the higher the level of monetization relative to GDP, the higher the profits of the Lebanese banking sector. It was also found that higher levels of profit are made by banks as banks are able to transform deposits into loans. In examining the impact of size on banks, it was also found that newer banks are more able to innovate and improve than older ones. As for internal variables (liquidity and non-performing loans ratio) affecting profitability, capital adequacy ratio showed no impact on return on assets but it affected return on equity significantly. Macroeconomic variables (gross domestic product and inflation) were not found to have an impact either on return on assets or return on equity. Finally, the findings indicate that financial development is a precondition for the Lebanese banking sector’s profitability.

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