Determinants of banks’ profitability : lessons from Palestinian banks

Abstract

The thesis investigates the impact of banks’ internal characteristics on profitability of banks operating in Palestine over the period 2009-2014. The study is motivated by the peculiarity of the Palestinian context and aims to explain the continuous profitability trends of the banking sector. The results of the OLS regression show that Palestinian banks’ profitability is positively associated with deposit to asset ratio, lending rate and bank size. However, high exposure to credit risk decreases the level of profitability. The findings imply that banks can adopt policies to attract deposits at low cost to reduce the costs associated with other sources of funds. Since lending rate is positively associated with profits, banks can maximize the use of available funds by granting loans to boost profitability. The presence of information dissemination institutions, public credit registries and private credit bureau enhances the screening process for banks in assessing potential borrowers, which essentially enhances the loan quality and reduces the default rates. This eventually improves banks performance. Furthermore, an ample horizon exists for banks operating in Palestine to grow and expand in terms of asset base, branch network and customer portfolio. This expansion enables banks to reap the benefits of larger size as a result of economies of scale