The nexus between interest rate and bank profitability: Does bank prudential capital matter?

Abstract

The credit expansion policy and banking regulations have attracted widespread attention of bank regulators and policymakers over the last few years. This research aims to examine how the interest rate, prudential capital, and their interaction impact banking profitability in emerging economies like Egypt. The final sample of banks registered by the Central Bank of Egypt comprises 22 banks during the period of 2011–2020. The cross-sectional time-series Generalized Least Squares (GLS) regression approach is used to estimate the panel data. The findings confirm that low-interest rates indeed harm banks’ profitability. In addition, higher prudential capital enhances the profitability of banks. Importantly, the impact of low-interest rates on bank profitability can be diminished only when banks are maintaining higher prudential capital. Based on the findings, it is recommended that bank managers and policymakers in Egypt as well as in similar emerging economies shall promote the application of the Basel Capital Accord to increasingly strengthen the profitability of banks, which in turn reinforces the performance of the banking sector, especially during low-interest rate times. The findings also reveal that bank-specific characteristics such as large bank size, increased efficiency, and less concentrated market enhance banks’ profitability. Overall, the findings of this research are highly relevant since improved profitability is one of the main objectives of bank supervisors and regulators. AcknowledgmentsThe authors are grateful to Mr. Ali Shaker and Amira Ragab for their valuable support.

Venturing into Risk Management: Examining Credit Risk and Performance in Pakistani Commercial Banks through Panel VAR Analysis from a Business Perspective

“…An unchecked GNPLR can drain a bank's capital reserves, which affects lending ability: as these loans dwarf income generation, it disenchants investors-all of which is antithetical to profitability. Banks must remain ever more vigilant in risk management and stay ahead of these loans to pursue a financially robust position that sustains profitability (Shahin et al, 2022). Finally, the relationship between GNPLR and the bank's performance is instructive on two main counts.…”