Kurdistan Regional Government- Iraq/ Council of Ministers / Ministry of Higher

Education & Scientific Research / Salahaddin University / Erbil / College of

Administration and Economics / Department of Finance and Banking

The Impact of Profitability Measures on Financial

Performance an evaluation of a bank's performance

Case Study in Kurdistan Bank - Erbil

Prepared by:

Shakar Tariq Reband rashad

Saman Muhamad Rebaz Nazim

Omar Fakhraden Salh Sami

Supervisorerd by

Dr. Kawa Wali

2020 - 2021

عێراق - رێمي كوردستانتى ههحكومه

زيران نى وهنجومهئه

ى زانستى وهتوێژينه تى خوێندنى باڵا و زارهوه

ولێر هه-دينلاحهتى زانكۆى سه رۆكايه سه

ئابوورى به ريه وه بردن وكۆلێژى

العراق /حكومة أقليم كوردستان مجلس الوزراء

العلمي وزارة التعليم العالي والبحث أربيل /رئاسة جامعة صلاح الدين

الادارة والاقتصاد كلية

1

This study dedicated to our beloved parents and family for their love,

endless support, encouragement and sacrifices

Researchers

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Praise be to Allah to help us to accomplish this work, peace and blessings be upon His Noble

Prophet, we would like to offer thanks and appreciation to our lecturer and supervisor Dr. Kawa

Wali, for his support, guidance. We would not be able to make it this far without your help and

support, thanks for your time, effort, patience and your trust in us. Finally, we would like to

thank the head, lecturers of the finance and banking department, our dear colleagues, and all

those who helped us all the way through the research.

Researchers

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Contents

Chapter 1: Introduction………………………………………………………5

1.1 Research Question ........................................................................................ 5

1.2 Research Objectives ...................................................................................... 6

1.3 Research Significant ..................................................................................... 6

1.4 Hypotheses Development ............................................................................. 8

Chapter 2: Literature Review ............................................................................ 9

2.1 Performance Analysis: .............................................................................. 9

2.2 Areas and Importance of Financial Performance Analysis: ............... 10

2.3 Factors Affecting Performance of Banks: ............................................. 12

2.4 Measures of Bank Performance: ............................................................ 13

2.4 Islamic Bank:............................................................................................ 14

2.5 Theoretical Basis of the Concept of Islamic Banking: ......................... 14

2.6 Distinguishing Features of Islamic Banking: ........................................ 15

2.7 Objectives of Islamic Banking: ............................................................... 17

2.8 Islamic Banking for Development: ........................................................ 18

2.9 Profitability of Islamic Banks : ................................................................ 18

Chapter 3: PRACTICE ANALYSIS……………………………………….

.Error! Bookmark not defined.

3.1 Data Analysis: ............................................................................................ 7

3.2 Profitability measures' status ................................................................... 8

3.3 Descriptive Statistics .................................... Error! Bookmark not defined.

3.4 Testing Hypotheses and Analysis of variables ....... Error! Bookmark not

defined.

Chapter 4: Conclusion & Recommendation ...... Error! Bookmark not defined.

4.1 Conclusion: ................................................... Error! Bookmark not defined.

4.2 Recommendation: ........................................ Error! Bookmark not defined.

Reference: .......................................................................................................... 28

4

Abstract

The research concept revolves in essence around (the effect of

profitability ratios on the financial performance of the Kurdistan International

Bank for the period from (2015-2017) a quantitative and descriptive comparative

analysis) in light of the profitability ratios according to the number of commonly

used financial indicators in this regard, and the study focuses on the financial

performance for the period from (2015-2017).

This study aims to show the return indicators (evaluation) of Kurdistan Bank that

have been studied and listed on the Iraq Stock Exchange. Explain the importance

of this activity, analyze the level of profitability and the effectiveness of the

measures followed to maximize profits and try to reach scientific and practical

results that would help the financial decision maker in the concerned bank to

verify the nature of the relationship. Between performance appraisal and

profitability indicators.

The study extended to the International Kurdistan Bank, and we used two

methods: observational and descriptive analysis to explain the financial results of

Kurdistan Bank in Erbil from 2015 to 2017. The bank’s financial statements such

as the income statement and the balance sheet, and the success measure (ROA)

or (ROE) that can be used to help in Measuring the bank’s profitability, as well

as deriving and evaluating interest rates for the two years (2015-2017).

The study reached a number of conclusions and recommendations, the most

important of which are: The instability of the external environment in addition to

the economic environment of the studied bank leads to inevitable fluctuations in

its profitability that may expose it to loss or profit. The most prominent

recommendations were to provide an internal control system to assess financial

performance, and to review and evaluate this system periodically (monthly or

quarterly) in order to ensure the suitability and effectiveness of performance .

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CHAPTER 1

INTRODUCTION AND RESEARCH FRAMEWORK

Due to the changing banking environment, profitability, which is one of

the most important criteria to measure performance of banks have come under

intense pressure. Profitability is critical to the survival of commercial banks.

Firstly, dividends are paid from profits (cash profits) and secondly, profit is an

important source of retained earnings. Retained earnings are residual profits after

dividends are paid. These earnings are important component of bank capital for

its sustainability (Alkhazaleh, 2014).

Financial performance analysis is a study of relationship among the various

financial factors in business as disclosed by a single set of statement and a study

of the trend of these facts as shown in a series of statements. By establishing a

strategic relationship between the item of balance sheet and income statements

and other operative data, the financial analysis unveils the meanings and

significance and allows its user a better understanding of a firm's position and

overall performance. Evaluating the financial performance of business allows

decision makers to judge the results of business strategies and activities in

objective monetary terms. It also helps to evaluate and decision-making process

for business operation. Normally the ratios are used to determine the financial

performance an organization (Athanasoglou, 2008).

While accounting and financial indicators can provide important

information related to a bank's financial performance, the relationship between

many variables related to the success of the bank is measured, for example assets,

income, benefits, market value, number of employees, investments, and

customers. The study will focus on the financial performance of the Kurdistan

Bank, especially during the period of relative economic recovery, especially after

the elimination of the Islamic State in Iraq and Syria, which may have had a

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significant impact on the bank’s performance. Data were collected from the

annual report for the period 2015-2017

1.1 Research Question

The main objective of the Kurdistan bank is to comprehensiveness in

banking services through expanding the modes of investment, funding, and

banking services and products. Investing the available financial resources in the

best method that realizes higher revenues and profits in comparison with the risks

incurring from the banking transactions.

Working on the design and implementation of high-quality banking goods,

services, and technologies in accordance with Islamic Sharia. This financial

performance review of banks can be extremely useful in determining the

determinants of financial performance and developing plans for improved

performance. This research is intended to address the following issues:

1. What is the current status of selected bank efficiency metrics and bank-specific

variables?

2. What are the bank-specific variables that influence bank performance?

1.2 Research Objectives

The specific objectives for the study are as follows:

1. To investigate the current standing of selected bank performance metrics and

bank-specific causes.

2. Assess the factors influencing the International Kurdistan Bank's financial

results.

1.3 Research Significant

This study is significant for providing an improved understanding of the

determinants of international of Kurdistan banks' profitability and their precise

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effect on overall performance. Financial performance of a firm affects the interest

of its stakeholders. The stakeholders refer to trade creditors, bondholders,

investors and management and other user of financial statements. Trade creditors

are interested in the liquidity of the firm, bondholders are interested in the cash

flow ability of the firm, investors are interested in present and expected future

earnings as well as stability of these earnings and management is interested in

internal control, better financial condition and better performance of firm.

Therefore, the conclusions drawn from this study are beneficial and

valuable for Islamic banks in formulating the right operational policies that enable

them to generate sustainable profitability, which is essential for them to maintain

ongoing activity. The conclusions are also crucial for the investors by improving

their understanding of how to take the right investment decision that enables them

to obtain fair returns. Finally, it is also useful for researchers and academicians in

the field of finance, economics and banking for carrying out further studies in this

area.

1.4 Methodology

1.4.1 Research Design

Investigative study there are three familiar types of research approaches to

business and social research namely- inquiry within qualitative, and mixed

method approach. Though, each approach has its own strengths and limitations.

Moreover, certain types of social research problems call for specific approaches.

Hence, in selecting an approach one should take in to account that nature of the

research problem, the personal experience of the researcher and the audience for

whom the report will be written. Considering the research problem and

objectives, the qualitative nature of the data collected, qualitative research

approach found to be appropriate for this study. Descriptive and analytical

research designs have been used in this study.

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1.4.2 Data Collection

In order to obtain the data needed to complete search and to reach the results with

the achievement of study objectives, and as case study the researcher adopted the

theoretical side of the study, the researchers relied on many resources, such as

books, magazines, studies and the other resources.

1.4.3 Hypotheses Development

H0: Profitability ratios such as return on asset and return on equity are not primary

ratios to assess the financial performance of banks.

H1: In order to determine banks' financial performance, profitability measures

such as return on asset and return on equity are key ratios.

1.5 Study structure

Chapter 1 provides an introduction and framework for the study. Chapter 2 sheds

light on a literature review of several studies to describe and analyze recent

progress in relation to this study. The third chapter introduces the experimental

part of the study, in addition to data analysis, descriptive statistical issues, and

presentation of important findings. Finally, Chapter Four presents conclusions

and recommendations.

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CHAPTER 2

LITERATURE REVIEW

2.1 Performance Analysis

The Business Dictionary defines performance as "the accomplishment of a

given task measured against preset known standards of accuracy, completeness,

cost, and speed. In a contract, performance is deemed to be the fulfillment of an

obligation, in a manner that releases the performer from all liabilities under the

contract" (Bhandari, 2016).

The word 'performance' means 'the performing of an activity, keeping, in

view the achievement made by it.' In other words, 'performance' means 'the role

played by an arrangement keeping in view the achievement made by it.' In the

context of banks, it takes into account the way of their progress. Financial

performance analysis is a study or relationship among the various financial

factors in business as disclosed by a single set of statement and a study of the

trend of these facts as shown in a series of statements (Bhattarai, 2018). By

establishing a strategic relationship between the item of balance sheet and income

statements and other operative data, the financial analysis unveils the meanings

and significance of such items. Moreover, Financial performance analysis is a

process of evaluating the relationship between components parts of a financial

statement to obtain a better understanding of a firm's position and performance

(Ahuja & Majumdar 1998).

Financial performance is the process of measuring the results of an

organization policies and operations in terms of monetary value. These results are

reflected in the firm's profitability, liquidity or leverage. Evaluating the financial

performance of business allows decision makers to judge the results of business

strategies and activities in objective monetary terms. Normally the ratios are used

to determine the financial performance an organization. A well designed and

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implemented financial management is expected to contribute positively to the

creation of a firm's value (Padachi, 2006). "Financial analysis is to analyze the

achieved statement to see if the results meet the objectives of the firm, to identify

problems, if any, in the past or present and/or likely to be in the future, and to

provide recommendation to solve the problems" (Pradhan, 1986).

Various different researchers and writers have different idea and definition

about performance. However, majority of the researchers have used the term

performance to express the range of measurements of transactional efficiency on

input & output efficiency. Hence, financial performance is the process of

measuring the results of an organization policies and operations in terms of

monetary value. In other word, financial performance analysis is a study of

relationship among the various financial factors and identifying the financial

strengths and weaknesses of the firm by properly establishing the relationship

between the items of as disclosed by a single set of financial statement and a study

of the trend of these facts as shown in a series of statements. By establishing a

strategic relationship between the item of balance sheet and income statements

and other operative data, the financial analysis unveils the meanings and

significance of such items. Financial performance analysis is a process of

evaluating the relationship between components parts of a financial statement to

obtain a better understanding of a firm's position and performance (Kosmidou,

2006).

2.2 Areas and Importance of Financial Performance Analysis

Financial Performance analysis includes analysis and interpretation of

financial statements in such a way that it undertakes full diagnosis of the

profitability and financial soundness of the business. The financial analysis

program provides vital methodologies of financial analysis (Murerwa, 2015).

1. Areas of Financial Performance Analysis:

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In Financial Performance Analysis, we often focus on the firm's production

and productivity performance (total business performance), profitability

performance, liquidity performance, working capital performance, fixed assets

performance and fund flow performance. To evaluate the performance of

commercial banks, various financial ratio analysis tools can be used, such as:

profitability analysis, liquidity analysis, working capital analysis and financial

structure analysis.

2. Importance of Financial Performance Analysis:

Financial Performance Analysis unveils the financial health and stability

of a firm. It helps in determining the current position and in planning for

upcoming business plan. The key factor indicating a firm's growth and future

potentiality is the level of profitability achieved. So, there is a direct relationship

between utilizing financial resources and the profit generation for a firm.

Importance of use of financial data varies according to the specific interest of the

party involved and their interest is affected by the financial performance of a firm.

So, the financial performance analysis is important for different reasons:

• Shareholders: Shareholders are the owners of the company. Time and

again, they may have to take decisions whether they have to continue with

the holdings of the company's share or sell them out. The financial

statement analysis is important as it provides meaningful information to

the shareholders in taking such decisions. Shareholders are also interested

in present and expected future earnings as well as stability of these earnings

as they have invested their money on it.

• Management: Management team is responsible for taking decisions and

formulating plans and policies for the future. They, therefore, always need

to evaluate its performance and effectiveness of their action to achieve the

company's goal. Therefore, staying informed about the performance of the

company is crucial to the management team of firm. So, their areas of

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interest is focused in internal control, better financial condition and better

performance where information about the present financial condition,

evaluation of opportunities in relation to this current position, return on

investment provided by various assets of the company etc.

• Creditors / Depositors: Since, creditors/depositors are the liquidity

providers of the bank. They seek for the safety of their deposits. The

sufficient liquidity management will in better result in performance. So,

the performance of bank is important for them for making decision on

whether to hold or extend the deposit limits etc.

• Investors: Investors always seek for the potential profitable opportunities

to invest their fund so that they could secure their capital and get the

reasonable.

2.3 Factors Affecting Performance of Banks:

Different studies undertaken on the performance of banks suggest that

performances of banks are affected by both internal and external factors. (Shaher,

Kasawneh & Salem, 2011) studied twenty-three factors that affect the

performance, out of which they have narrowed down the top five factors that

affect the performance of banks, which are: Banks characteristic, Competition

environment, Economic indicator, Regulation and legal environment and Country

risk. (Mohana, 2012) suggests that the so called bank specific factors because

depending on the likely impact they have on the profitability of the bank they can

be reinforced (positive treatment) or weakened (negative treatment) by the

management of the bank. The major internal factors that affect performance of

banks include: capital structure, asset quality, management efficiency, earning

quality, liquidity, bank size, technology, human capital, loan performance and

income diversification among others. Moreover, some of the factors that affect

the performance of the bank could be under the control of banks management and

the others could be beyond management’s control. Those factors which could be

under the control of the management are called internal or bank specific factors

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likewise, those factors which are beyond the management’s control are referred

as external or macroeconomic factors and these factors are related to the industry

and macroeconomic factors of the country. These factors such as bank

concentration, inflation, GDP growth, effective tax rate, interest rate, among

others (Nirmal, 2004).

2.4 Measures of Bank Performance:

Among the large set of performance measures for banks used by academics

and practitioners alike, a distinction can be made between traditional, economic

and market-based measures of performance. Traditional performance measures

are similar to those applied in other industries, with return on assets (ROA), return

on equity (ROE) or cost-to-income ratio being the most widely used. In addition,

given the 13 importance of the intermediation function for banks, net interest

margin (NIM) is typically monitored (Pandey, 2016).

• Return on Asset (ROA): The return on assets (ROA) is the net income for the

year divided by total assets, usually the average value over the year. The ROA

reflects the ability of a bank’s management to generate profits from the bank’s

assets employed for the business. This is probably the most important single ratio

in comparing the efficiency and operating performance of banks as it indicates

the returns generated from the assets that bank owns. This ratio is calculated as

net profit after tax divided by the total assets.

• Return on Equity (ROE) Ratio of Return on Equity (ROE) is an internal

performance measure of shareholder value, and it is by far the most popular

tool. Return on equity is the return to shareholders on their equity. describes

that return on equity measures a corporation's profitability by revealing how

much profit a company generates with the money shareholders have invested.

The amount of net income returned as a percentage of shareholders equity.

Net income is for the full fiscal year (before dividends paid to common stock

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holders but after dividends to preferred stock). This ratio is calculated as net

profit after tax divided by the average total shareholder's equity fund.

• Net Interest Margin (NIM) Angbazo (1997) Explains that net interest margin

represents the difference between the generated interest income and the

interest expense relative to the interest earning assets. The margin is set by the

intermediaries at the level that covers all the costs and risks that are related to

financial intermediation. An optimal margin should generate enough income

to expand the capital base as the bank expose itself to more risk. In other word,

NIM is the difference between the interest income less interest expense

divided by total loan and advances. NIM reflects the cost of banks

intermediation services and the efficiency of the bank. This ratio is calculated

as net interest income divided by the average loan and advances.

2.4 Islamic Bank:

It appears from the above definitions that Islamic banking is a system of

financial intermediation that avoids receipt and payment of interest in its

transactions and conducting operations in a way that it helps achieving the

objectives of an Islamic economy. Alternatively, this is a banking system whose

operation is based on Islamic principle transactions of which profit and loss

sharing (PLS) is a major feature ensuring justice equity in an economy. That is

why Islamic banks are often known as PLS-banks (Abderrezak,, 2008).

2.5 Theoretical Basis of the Concept of Islamic Banking:

Conventional banking is essentially based on debtor-creditor relationship

between depositors and the bank in the one hand and between the borrowers and

the bank on the interest is considered as the price of credit, reflecting the

opportunity cost of money. Islam, on the other hand, considers loan to be given

or taken, free of charge, to meet contingency and that the creditor should not lake

any advantage of the borrower. The money is lent out on the basis of interest,

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more often it happens that it leads to some kind of injustice. The first Islamic

principle underlying such kinds of transactions is that “deal not unjustly and ye

shall not be dealt with unjustly”. Hence, commercial banking in an Islamic

framework is not based on debtor-creditor relationship (Abdul-Majid, 2010).

The second principle regarding financial transactions in Islam is that there

should not be any reward without risk-taking. This principle is applicable both

to labor and capital. As no payment is allowed to labor unless it is applied to

work, no reward for capital should be allowed unless it is exposed to business

risks. Thus, financial intermediation in an Islamic framework has been

visualized on the basis of the above principles. Consequently, financial

relationships in Islam have been participatory in nature. Several theorists

suggest that commercial banking in an interest-free system should be

organized on the principle of profit and loss sharing. The institution of interest

is thus replaced by a principle of participation in profit and loss. That means,

a fixed rate of interest is replaced by a variable rate of return based on real

economic activities. The distinct characteristics which provide Islamic

banking with its main points of departure from the traditional interest-based

commercial banking system are: (a) the Islamic banking system is essentially

a profit and loss sharing system and not merely an interest-free (Riba) banking

system; and (b) investment (loans and advances in conventional sense) under

this system of banking must serve simultaneously both the interest of the

investor and those of the local community. The financial relationship as

pointed above is referred to in Islamic jurisprudence as Mudarabah (Abdullah,

2007).

2.6 Distinguishing Features of Islamic Banking:

An Islamic bank has several distinctive features as compared to its

conventional counterpart. Six essential differences as below: (Abdul-Majid,

2010)

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1. Abolition of Interest (Riba): Since Riba is prohibited in the Holy Quran

and interest in all its form being akin to Riba as, confirmed by Fukaha and

Muslim economists with rare exceptions, the first distinguishing feature of

an Islamic bank must be that it is interest-free, while the abolition of Riba

would be the first and essential difference between the conventional

interest-based commercial banks and Islamic banks, if would not the

constitute the only difference between them. The nature, outlook and

operations of an Islamic bank would have to undergo a complete

transaction.

2. Adherence to Public Interest: Activity of commercial banks being

primarily based on the use of public funds, public interest rather than

individual or group interest will be served by Islamic commercial banks.

The Islamic banks should use all deposits, which come from the public for

serving public interest and realizing the relevant socio-economic goals of

Islam. They should play a goal-oriented rather than merely a profit-

maximizing role and should adjust themselves to the different needs of the

Islamic economy.

3. Multi-Purpose Bank: Another substantial distinguishing feature is that

Islamic banks will be universal or multi-purpose banks and not purely

commercial banks. These banks are conceived to be a crossbreed of

commercial and investment banks, investment trusts and investment

management institutions and would offer a variety of services to their

customers. A substantial part of their financing would be for specific

projects or ventures. Their equity-oriented investments could not permit

them to borrow short and lend long. This should tend to make them less

crisis-prone compared to their capitalist counterparts. Since the overnight,

call loan or very short-term inter-bank market may be available to them

only to a limited extent, they may have to make a greater effort to match

the maturity of their liabilities with the maturity of their assets.

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4. More Careful Evaluation of Investment Demand: Another very important

feature of an Islamic bank is its very careful attitude towards evaluation of

applications for equity-oriented financing. It is customary that

conventional banks evaluate applications, considers collateral and avoids

risks as far as possible. Their main concern does not go beyond ensuring

the security of their principle and interest receipts. Since the Islamic bank

has in built mechanism of risk-sharing, it would need to be careful more

careful. It adds a healthy dimension in the whole lending business and

eliminates a whole range of undesirable lending practices.

5. Work as Catalyst of Development: Profit-Loss-Sharing being a distinctive

characteristic of an Islamic bank, if fosters closer relations between banks

and entrepreneurs. It helps develop financial expertise in non-financial

firms also enables the banks to assume the role technical consultants and

financial advisors and act as catalysts in the process of industrialization and

development. The bank would take care of all the responsible and agreed

financial needs of their clients thus relieving them of the need to run around

for funds to overcome their normal liquidity shortages.

2.7 Objectives of Islamic Banking:

Using of advanced banking technology applications and keeping pace with

their developments continuously to secure achievement of banking services

with efficiency and effectiveness. Acting to attract deposits and funds from

entities and individuals and realizing continuous growth rates therein. But the

objective of Islamic bank when viewed from the context of its role in an

economy, its specific objectives may be enlisted as following: (Abedifar,

2013)

1. To offer contemporary financial services in conformity with Islamic

Shariah;

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2. To contribute towards economic development and prosperity within the

principles of Islamic justice;

3. To facilitate efficient allocation of resources;

4. To help achieving stability in the economy;

Offer Financial Services:

Interest-based banking considered to be practicing riba in financial transaction

has Islamic banking is clearly meant for creation of provision for Shariah

approved financial transactions

2.8 Islamic Banking for Development:

Islamic banking is claimed to be more development oriented than its

conventional counterpart. The mechanism of Profit-Sharing is build-in

development promoter since it establishes a direct relationship between the

benefit of the bank and the entrepreneurs (Abdullah, 2007).

Optimum Allocation of Recourses:

Another important objective of Islamic banking is the optimum allocation

resources. The basic mechanism of Islamic banking system is such that

financial resources are allocated to projects which are considered to be more

profitable. The means, in the case of Islamic banking profitability of projects

works as deciding factor as to where the financial resources will go and to

what extent.

2.9 Profitability of Islamic Banks :

The most widely used method to examine the profitability of a firm is ratio

analysis. The profitability ratios that are believed to well represent a bank’s

financial status and that have been used by authors of the field such are return

on assets (ROA), return on equity (ROE) and return on deposits (ROD). High

result in any of those ratios indicates higher profitability of the bank. Those

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abovementioned ratios are utilized in the current research and each ratio is

briefly explained hereinater.

Return on assets (ROA) ROA indicates how much net income is generated

per each IQD of bank assets. Higher ROA indicates higher returns made by

the Islamic bank on each unit of assets (Casu et al., 2006).

Return on equity (ROE) ROE shows how much net wealth each IQD invested

by the shareholders generated. Higher ROE means more wealth was created

per each unit invested (Al-Amri, 2009).

Return on deposits (ROD) ROD shows how much net wealth was created for

each IQD deposited by the bank’s customers. Higher ROD indicates more

wealth for each IQD deposited.

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CHAPTER 3

EMPIRICAL ANALYSIS

3.1 Data Analysis

The aim of this chapter is to review and clarify the obtained data in order to

achieve the study's goal after converting unprocessed data to an understandable

presentation. The data in this chapter have been evaluated and interpreted using

financial and mathematical methods in accordance with the analysis approach

discussed in the third chapter. In the research section, different tables were used

to display the data obtained from various sources, which were then translated into

the necessary tables based on their similarity.

3.2 Profitability measures' status

From 2015 to 2017, this clear line chart depicts the pattern of Kurdistan banks'

financial results as well as the trend. Tables 4.1 and 4.2 illustrate the pattern

banks' financial success over five fiscal years as measured by return on asset

(ROA), return on equity (ROE), and net interest margin (NIM). Similarly, capital

adequacy ratio (CAR), bank size (SIZE), and inflation rate are bank-specific and

macroeconomic variables (INF).

3.3.1 Dependent Variables

The dependent variable is something whose outcome is determined by the other

independent variable. As the experimenter component alters the independent

variables, the influence on the dependent variable is altered, observed, and

registered.

Bank efficiency is usually calculated by ROA, ROE, or NIM. Studies on the

determinants of bank success use one or a combination of these ratios as a metric

of performance in their study. According to the European Central Bank (2010),

21

the most often used measures are return on assets (ROA), return on equity (ROE),

and cost-to-income ratio. Furthermore, due to the role of the intermediation

mechanism for banks, net interest margin (NIM) is normally controlled.

3.3.2 Independent variables

The independent variable is the one whose shift in the experiment is unaffected

by every other variable. Unless the researcher or the system shifts, it is stable.

Both internal and external influences influence a bank's efficiency.

Internal factors are those over which the bank's management has authority, while

external factors are those over which the bank's management has no authority.

Four independent variables are used in this analysis for this reason. Two of these

four factors are internal and external to the bank, and we assume that they better

describe the determinants of bank success for the purposes of our analysis.

3.4 Descriptive Statistics

Table 3.1 displays the descriptive statistics for the variables used in the analysis.

The results show that the sample's minimum and maximum output measures in

terms of profitability metrics ROE, ROA, and NIM, as well as other independent

variables in Bank of Kurdistan.

Table 3.1 Description Data of sample Bank

The efficiency of bank has seen an upward trend, as shown in figures 3.1 and 3.2.

Over a three-year sample cycle, the average ROE has steadily declined from

15.81 percent to 17.20 percent. But for 1.72 in 2015, the ROA ranges from 1.93

Bank

Years ROA(y1) ROE(y2) NIM(y3) INF(x1) CAR(x2) SIZE(x3)

Kurdistan

Bank

2015

0.75 11.22 3.04 .16 23.30 7.1

2016

.007 .1412 3.40 .25 23.19 8.2

2017 5.00 .019 3.86 4.5 24.30 8.1

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to 2.09. Similarly, NIM has been steady at 3.11 percent to 3.60 percent. CAR and

bank size are bank-specific independent variables that have a constant yet mild

upward trend. In 2016 and 2017, CAR was 12.25 percent and 14.67 percent,

respectively, and bank scale was 7.86 percent and 9.12 percent.

Table 3.2 Mean (Average) Indicator of Kurdistan Bank

Details

%

2015

2016

2017

ROA = Return on Assets % 1.72 1.93 2.09

ROE = Return on Equity % 15.81 17.20 19.49

NIM = Net Interest Margin % 3.12 3.36 3.60

CAR = Capital Adequacy Ratio % 12.25 13.41 14.67

GDP 4.56 5.51 6.71

INF 5.0 4.5 4.0

SIZE = Bank Size 6.21 7.86 9.12

The ROA mean was 1.72. percent, ranging from minimum percent to maximum

percent, which is satisfactory because ROA of 1.93 to 2.09 percent is considered

decent in general. ROE is also appropriate, with a mean value of 15.81. From

10.84 to 19.49, the CAR mean is 12.25. The INF mean is 5.0 percent, with a range

of 4.5 to 4.0 percent. SIZE and NIM are also fairly changed. Return on assets

(ROA) and net interest margin (NIM) are significantly correlated with gross

domestic product growth rate (GDP) at 0.05 confidence level in positive

direction, and return on equity (ROE) is significantly correlated with annual

inflation rate (INF) at 0.05 confidence level in positive direction, according to the

checked results.

23

Figure 3.1 Capital adequacy ratio CAR

Figure 3.2 Dependent variable ROA

Dependent Variable ROA

Independent Variable CAR

24

Figure 3.3 Dependent variable ROE

Table 3 Variables' Correlation

* Correlation is significant at the 0.05 level (2-tailed).

** Correlation is significant at the 0.01 level (2-tailed).

3.5 Testing of Hypotheses and Analysis of variables

The degree of interaction between two variables is represented by this matrix. When the value

of one variable changes, the value of the other changes, this is referred to as correlation.

The calculated correlation coefficients were checked for significance using the t-test at the 0.05

and 0.01 levels, with a degree of freedom of 10. The checked results show that return on assets

ROA

ROE NIM CAR SIZE INF

ROA 1.000

ROE 0.393 1.000

NIM 0.756 0.423 1.000

CAR 0.065 -0.423 -0.081 1.000

SIZE 0.0871 -0.308 0.141 0.111 1.000

GDP 0.345* -0.325 0.032 0.212 0.312

INF 0.148 0.425 *, ** -0.142 -0.335 0.277 1.000

Dependent Variable ROE Dependent Variable ROE

25

(ROA) and net interest margin (NIM) are considerably higher, therefore the Null hypothesis

will be rejected and alternative hypothesis accepted.

According to the checked results, return on assets (ROA) and net interest margin (NIM) are

significantly correlated with gross domestic product growth rate (GDP) at 0.05 confidence level

in positive direction, and return on equity (ROE) is significantly correlated with annual

inflation rate (INF) at 0.05 confidence level in positive direction.

26

CHAPTER 4

CONCLUSIONS AND RECOMMENDATIONS

4.1 Conclusions

The aim of this research was to look into the factors or determinants that affect

and effect bank efficiency by using profitability as a performance metric. The

following metrics were used: return on asset (ROA), return on equity (ROE), and

net interest margin (NIM). Three metrics have three dependent variables. For the

years 2015 to 2017, two categories of explanatory variables were used as

independent variables: capital adequacy ratio (CAR) and bank size (SIZE) as

bank basic independent variables and inflation rate (INF) as macroeconomic

variables.

Using the research method Coefficient of Correlation measure, it can be seen that

the inflation rate (INF) has a favorable relationship with the return on equity

(ROE). This finding shows that the higher the GDP growth rate, the higher the

return on asset (ROA) and net interest margin (NIM), and vice versa.

Similarly, if the inflation rate (INF) rises, so will the bank's return on equity

(ROE). Internal variables such as capital adequacy ratio (CAR) and bank size

(SIZE) also have an effect, although to a lesser degree and in an inconsistent

manner. According to the outcomes of the above relationships, the gross domestic

product growth rate (GDP) is the most important factor influencing profitability.

4.2 Recommendations

1. The Kurdistan International Bank for Investment and Development should

focus on activities that generate higher bank returns than other activities and

provide the best banking facilities to encourage customers to deposit with the

bank.

27

2. To provide an internal control system to evaluate financial performance, and

to review and evaluate this system periodically (monthly or quarterly) in order to

ensure the suitability and effectiveness of performance.

3. The management of the Kurdistan International Bank for Investment and

Development should focus on the balance between liquidity and profitability and

not leave idle cash in the fund, which affects the decline in the profitability index.

4. The necessity to focus Kurdistan International Bank for Investment and

Development on short-term investments due to the revenues they generate, and

this is what the bank’s final accounts showed during the comparison period.

5. The necessity of introducing the accounting staff in the bank to training courses

to increase their knowledge and develop it in the field of conducting bank

performance evaluation studies in order to conduct future studies that would

incur.

List of Abdications

ROA Return on Assets

ROE Return on Investment

CAR Capital Adequacy Ratio

GDP Gross Domestic Product

INF Inflation Rate

NIM Net Interest Margin

SIZE BANK Size

28

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