EFFECT OF MACRO-ECONOMIC VARIABLES ON PROFITABILITY OF NEPALESE COMMERCIAL BANKS

Abstract

Due to the vast contribution of commercial banks to the economic development in Nepal, this study examined the effect of macroeconomic variables on profitability of Commercial Banks listed at the Nepal. For years 2013 to 2023. The objective was to determine the effect of macroeconomic factors on the profitability. Panel data for the 3 listed banks in the Nepal was utilized. Panel data regression analysis with random effects was utilized on the data to examine the effects of these five macroeconomic variables which included: Capital Adequacy Ratio (CAR) Inflation, Default risk, Inflation rate, operating expenses to total loan. Return on Asset (ROA) and Return on Equity (ROE) which proxies’ profitability. The study findings indicated that real inflation rate had positive significant effect on profitability of commercial banks as measured through Return on Assets (ROA) and Return on Equity (ROE). While rest of the macro-indicators do not have a significant impact on profitability measured by ROA, ROE and NIM. It is therefore indicating that internal factors are impacting the profitability of banks in the Nepal rather than external factors.