contents asian finance & banking review vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business organizational culture and personality trait inferences about organizations ibrahim aliyu and o. d. y. malacky organizational culture and personality trait inferences about organizations ibrahim aliyu1 o. d. y. malacky 2 1department of business administration, bauchi state university, gadau, nigeria 2department of business administration, ahmadu bello university, zaria, nigeria correspondence: ibrahim aliyu, department of business administration, bauchi state university, gadau, nigeria, email: ibrahimaliyu93@yahoo.com received: october 14, 2017, accepted: october 19, 2017, online published: october 26, 2017 abstract the use of personality traits to describe organization left managers and researchers with the problem of identifying its source in order to take advantages of positive ones and avoid the disadvantages of negative ones. one of the possible sources of personality inference about an organization is organizational culture. thus, the study identifies the influence of organizational culture on personality trait inference about organizations. data were collected from 210 staff members of saj food limited zaria and analyzed using multiple regression on spss version 18. the result revealed that organizational culture leads to personality trait inference about an organization. it was also recommended that managers should mind the way policies are design and decision are made in their organizations because it decides the image of the organization in the eyes of the members of the public. keywords: organizational culture, personality trait, and personality trait inference. 1. introduction it is very common to hear people either within (marketers or spoke people) or outside an organization using some slogans/adjectives to describe the organization, based on how they perceived its practices and performance. these slogans, suggest that organizational decision makers and individuals who are responsible for firms’ marketing or advertising attempt to portray companies as having personalities. perceptions of organizations ’personalities likely are formed not only through these deliberate advertising strategies but also through the type and quality of their products and services, the physical aspects of their places of business, their employees, clients that use their products and services, and social information. one important reason for studying personality trait inferences about organizations is that the way a prospective applicant perceives an organization's personality may influence that person's attraction to the organization as a place to work. the decision to apply for a job is related to the general impression that an applicant holds about an organization's overall attractiveness (belt &paolillo, 1982). some organizations are referred to as conservative, dynamic, greedy, reliable, discipline etc. an organization that is perceived as conservative or greedy may not be attractive to young innovative skilled candidates, especially when options exist.this by extension will have an effect on customers' satisfaction, since these innovative candidates are very strategic in understanding customer demand, creating a product to match it and attracting new and retaining existing customers.jerel michael and scott 2004() . when they consider an organization’s culture as positive, that is how they will infer a positive personality trait about the organization and if negative, then negative personality trait. a trait, positive or negative has implication on the business of an organization. one of the possible sources of such inferences is the organizational culture; the way people perceive the culture of an organization; that is how they will match it with an appropriate personality trait. an organization can base its culture on hierarchy, market or adhocracy. a hierarchy based culture can attract personality traits like a conservative; a market based can be referred to as greedy while adhocracy base can be seen as dynamic. it is against this background that this study is designed to determine the extent to which organizational culture leads to personality trait inference about organizations.the study is guided by the following hypotheses: h 01: hierarchy culture does not lead to personality trait inference about organization h 02: market culture does not lead to personality trait inference about organization h 03: adhocracy culture does not lead to personality trait inference about organization 2. literature review schein (1992) defined organizational culture as the pattern of basic assumptions that a given group has invented, discovered or developed in learning to cope with its problems of external adaptation and internal integration. organizational culture is the practice of an organization. webber 1978() proposed seven characteristics that have become known as the classical attributes of bureaucracy rules, specialization, meritocracy, hierarchy, separate ownership, impersonality, and accountability. according to cameron and quinn 2011() , the organizational culture compatible with this form is characterized by a formalized and structured place to work. the long-term concerns of the organization are stability, predictability, and efficiency. formal rules and policies hold the organization together. key values center on maintaining efficient, reliable, fast, smooth-flowing production. thus, in hierarchy culture, a clear and defined structure must be in place and adhered to. the market culture, according to cameron and quinn 2011() , the market culture is focused on transactions with factors of external environment such as suppliers, customers, contractors, licensees, unions, regulators and so forth. the core values are competitiveness and productivity. competitiveness and productivity in market organizations are achieved through a strong emphasis on external positioning and control. the basic assumptions in a market culture are that the external environment is not friendly but hostile, consumers are choosy and interested in value; the organization is in the business of increasing its competitive position. in market cultured organization focus on sourcing for cheaper input, spend much in developing strategies to acquire new and retain customers. according to cameron and quinn 2011() , a major goal of an adhocracy is to foster adaptability, flexibility, and creativity where uncertainty, ambiguity and/or informationoverloadare typical. an important challenge of theseorganizations is to produce innovative products and services and to adapt quickly to new opportunities. a high emphasis on individuality, risk-taking and anticipating the future exists as almost everyone in an adhocracy becomes involved with the production, clients, research and development and so forth. hogan (1996) described personality traits as attributes people use to evaluate another in order to reveal the amount of status and acceptance that a person has been granted. this definition viewed it as a tittle given to an individual by people or individual that represents their final evaluation of attitude and capability.in another view by buchanan and huczynski (2004), they term it as the set of properties of behavior which makes an individual different from others. this view regarded it as tittle used by people to differentiate an individual from others base on his behavior. some researchers looked at it from a psychological point of view. robert 2007() says the personality trait isa dynamic psychological organization that coordinates experience and action.it is also the organizationwithin the individual of those psychophysics systems that determine his unique adjustment to the environment (robbin, stephen & timothy, 2008). base on the above views, personality trait is a term used by people to qualify an individual as a representation of their perception towards his/her attitude, behavior and capability while reacting to his environment. personality trait inference about organization includes slogans and many other descriptions which suggest that organizational decision makers and individuals who are responsible for firms' marketing or advertising attempt to portray companies as having personalitiesjerel e. slaughter, et al., 2004() .robert 2007() looked at it as the perception of stakeholders of an organization about its policies and practices presented in human quality. 2.1 theoretical framework 2.1.1 contingency management theory the situational or contingency theory argued that when managers make a decision, they must take into account all aspects of the current situation and act on those aspects that are keys to the situation at hand. basically, it is the approach that “it depends”. for example, if one is leading troops, an autocratic style is probably best. if one is leading a hospital or university, a more participative and facilitative leadership style is probably best. when a subsystem in an organization behaves in response to another system or subsystem, we say that response is contingent on the environment. hence a contingency approach is an approach where the behavior of one subunit is dependent on its environmental relationship with other units or subunits that have control over the consequences desired by that subunit. contingency approach is not decisive whether a leader should or not involve subordinate in the setting of goals and decision process, it depends on aspects of the current situation. if the situation warrants he can involve them and if it does not he adopt an autocratic style. thus, culture in contingency can be hierarchy, market or adhocracy but not hierarchical. this work adopted contingencymanagement theory as the working theory because it suggests that if the prevailing environmental condition in an organization is highly strict work, the manager structures the organization and establishes hierarchy culture. if the market is the greatest concern, all the workers' effort will be directed towards customer satisfaction, thereby market culture. while in the innovative environment, a greater percentage of the organizational resources (man, machine material, money, and information) will be directed towards innovation, thereby adhocracy culture. each of these cultures can lead to personality trait inference, and if all exist in one organization, the organization may attract more than one personality trait inferencedepending on the level at which people notice them. 2.2 conceptual framework 2.3 conceptual framework hierarchy culture market culture adhocracy culture personality trait inference source: researchers’ work the above diagram shows that hierarchy culture can lead to personality trait inference as indicated by the arrow linking hierarchy culture and personality trait inference. this case is the same with market culture and adhocracy culture. 3. research methodology the researcher adopted cross-sectional research design where data were collected from saj food limited and analyzed to explain the extent to which people make personality trait inferences about organizations give their culture. the population of this study is all the 390 staff members of saj food limited zaria, kaduna state. the data was collected using an adopted questionnaire. the revisited reliability of the instrument was measured using cronbach’s alpha with no variable having less than 0.788 coefficient. therefore, it significantly measured our variables. 3.1sample size and sampling technique the sample size of this study is 210 staff members of saj food limited zaria, kaduna state. this number was determined using cochran (1963) formula to be 197.5 but 210 respondents were taken to have more representation and provide for non-return and incorrect filling of the questionnaire. 3.2tool of data analysis the data from the population of this study were analyzed and the hypotheses were tested using multiple linear regression techniques. the decision to use multiple linear regressions was informed by the fact that this study has three independent variables and one dependent variable and the study intends to find out the influence of organizational culture on personality trait inference about an organization. multiple linear regression is appropriate in measuring the influence of more than one variable on another. 4. data analysis 4.1 test of hypotheses and result the following hypotheses are to be tested at 5% level of significance and the decision rule is that if the t-values are less than the critical values we accept the hypotheses and if equal or greater than the critical values, we reject them. · hierarchy culture does not lead to personality trait inference about organization · market culture does not lead to personality trait inference about organization · adhocracy culture does not lead to personality trait inference about organization the independent's variables are denoted in the table as: · hierarchy culture (hc) · market culture (mk) · adhocracy culture (ac) while the dependent variable is denoted as: · personality trait (pt) model r r square adjusted r square std. error of the estimate 1 .798a .637 .631 .28729 a. predictors: (constant), ac, hc, mk b. dependent variable: pt the model summery table shows an adjusted r square value of 0.631 which means that 63.1% of the variation in the dependent variable (personality trait inference) was as a result of the variation in the three dimension of the independent variable (hierarchy, market andadhocracy cultures).therefore, going by this value, organizational culture appeared a strong variable in predicting personality trait inference about organizations. coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 1.381 .588 2.346 .024 hc -.157 .170 -.120 -.924 .361 mk .313 .135 .308 2.315 .026 ac .375 .097 .491 3.876 .000 source: researchers’ calculation using spss base on the table above, the null hypothesis which stated that hierarchy culture does not lead to personality trait inference about an organization is hereby accepted. this is because of the t-value (-0.924) against hc, is less than the critical value (1.96) and it is insignificant at 5%, this shows that hierarchy has a negative insignificant impact on personality trait inference about an organization. the one which stated that market culture does not lead to personality trait inference about an organization is rejected because the t-value against mk is 2.315 which is greater than the critical value (1.96) and it is significant at 5%. also, the other which stated that adhocracy culture does not lead to personality trait inference about an organization is also rejected because the t-value against ac is 3.876 which is greater than the critical value (1.96) and it is significant at 1%. this means that market and adhocracy culture have a positive significant impact on personality trait inference about an organization. 5. findings, conclusion, and recommendation 5.1 findings base on the above result, it is found that hierarchy culture does not lead to personality trait inference about an organization in saj food ltd. it is also found that market culture leads to personality trait inference about an organization in saj food ltd. it is also found that adhocracy culture leads to personality trait inference about an organization in the saj food ltd. 5.2 conclusion base on the above findings, it is concluded that hierarchy culture does not lead to personality trait inference about the organization. this is because it does lead to such inference in the saj food ltd. it is also concluded that market culture leads to personality trait inference about an organization. it can be seen from the finding of this work that it leads personality trait inference about saj food ltd. it is also concluded that adhocracy culture leads to personality trait inference about an organization. this is based on the finding that it leads to such inference in the saj food ltd. 5.3 recommendation base on the findings the following recommendations were made: · as the hierarchy culture in the saj food ltd. does not lead to personality trait inference about it, this shows that its hierarchy is no so bureaucratic that calls the attention of its workers, therefore, they should maintain it. · it also recommended that food ltd. should pay attention to its market and adhocracy cultures so that they do not lead to negative personality trait inference about it · another recommendation is that they should find out the type of personality trait inferred about the organization so that they can work in the same direction in case of positive traits and change direction in case of negative traits · organizations not only saj food should mind their cultures because they attract personality trait inferences about them, positive or negative. 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(1947).the theory of social and economic reform: free press, new york copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. 48 54 asian finance & banking review; vol. 2, no. 1; 2018 issn 2576-1161 e-issn 2576-1188 published by centre for research on islamic banking & finance and business 1 debt-growth bond in nigeria: structural break analysis emmanuel o. okon 1 & halirat umar 1 1 department of economics, kogi state university, anyigba, kogi state, nigeria correspondence: emmanuel o. okon, department of economics, kogi state university, anyigba, kogi state, nigeria, e-mail: tonydom57@yahoo.com. tel: +2348023275716 received: january 7, 2018 accepted: january 9, 2018 online published: january 11, 2018 abstract this study examined the structural break relationship between external debt and economic growth from 1985 to 2016 with a view to examine the effect of external debt relief on economic growth in nigeria. the study used the ordinary least square technique. in addition, it employed the chow test and also adopted the similarity of error variances test in its analysis. from the results and analysis, it was revealed that external debt stock (exd) is positively and insignificantly related to rgdp. it was concluded that the 2005 external debt relief did significantly caused a change in external debt, external debt service relations with economic growth in nigeria. based on these findings, the study suggested that external finance should be used only for projects of highest priority. spending of external debt on productive self-liquidating investments must be strictly adhered to while projects to be financed with external loan must be properly appraised. keywords: debt, growth, structural break, similarity of error variances test, nigeria 1. introduction the motive behind external debt is to boost economic growth and development of any nation but as a result of future high debt service payments, it poses a serious threat to the economy of that nation. economic researchers have therefore sought out to investigate the implication of external debt burden on the economies of debtor nations and have come up with diverse views (safdariand mehrizi, 2011; ejigayehu, 2013). base on the empirical analysis of (elbadawi et al., 1997; pattilo et al., 2004; clements et al., 2003) that the debt-growth relationship follows a bellshaped curve where, beyond a certain threshold, the impact of debt on growth becomes negative. this suggests that debt relief can reduce the debt stock below that peak threshold, which helps to reinstate the incentives to invest. this threshold is similar to the debt overhang that nigeria has experienced which led to the 1999 struggle for debt relief. many studies have been conducted in nigeria to investigate whether or not debt relief granted to nigeria is effective in improving its economic growth(fosu, 2007;omotola and saliub, 2011;ekperiware and oladeji, 2012).bakare (2010) investigated whether or not debt relief granted to nigeria is effective in improving its economic growth and development. the results show that debt overhang problem of nigeria had been alleviated by the debt forgiveness but the growth indicator was not positively influenced by the debt service relief which one would expect. the answer to the question of the study –if debt relief has brought an improvement to the economic performance of the nation so far is therefore disillusioning. all in all, the findings suggest that the debt relief has not led to high economic growth in nigeria. this result is similar to what were found in similar studies for some highly indebted countries, which have received debt relief. the review of empirical and methodological issues show that authors have used paired sample t-test statistics, to using ordinary least squares method (ols), to using quarterly time series in studying the debt relief granted to nigeria effective in improving economic growth. however, this study examined the structural break relationship between external debt and economic growth from 1985 to 2016 with a view to examine the effect of external debt relief on economic growth in nigeria. 2. research methodology this study relies heavily on data collected from secondary sources covering the period 1985-2016. the choice of this period is because nigerian external debt really began to mount within this period and the 1999 struggle for debt relief that finally came in 2005. to be précised, from 1985 to2005 is the period preceding the october 2005 external www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 2 debt cancellation and from 2006 to 2016 is the post debt cancellation period. the period is furthermore justified because of availability of data. the data were collected from statistical bulletin of the central bank of nigeria. annual time series of external debt, external debt service, exchange rate and real gross domestic product (rgdp) were used to determine the structural break effect of external debt on economic growth in nigeria as a result of debt relief. the time series variables when used in their explosive form often leads to spurious regression results which mislead policy. in view of the above, this study adopted augmented dicky fuller (adf) test for unit root in order to attain stationarity of the series. thereafter, the study used the ordinary least square technique because of its qualities: best linear unbiased estimates. in addition, the study employed the chow test and also adopted the similarity of error variances test in its analysis. the chow test is a test that determines if the coefficients from two regression analyses are the same where each of the equations represents a different group. the null hypothesis is then tested by running three (3) regressions: one for each group and one for the entire sample. thereafter, the f-test is employed to determine if the models are significantly different from one another. the analysis was conducted with the use of eviews software. 2.1 model specification the relationship between economic development and public debt in developing countries has largely been based on a standard production function model: y = f(k,l) ---------------(1) where y, l and k are measures of output, capital and labor respectively. according to debt overhang theory, if the debt of a country is more than its repayment capacities, this discrepancy will negatively affect investment and the ability to work and therefore affect the growth of the economy. the present study includes external debt, external debt service and exchange rate in the growth function. the study extended the function from eq (1) to eq (2) as: y= f(external debt, external debt service, exchange rate) ----------(2) in eq (2), the variables are used in order to determine the individual effects on economic growth. this study therefore adopts the cobb-douglas production function to establish the output equation for nigeria for the 30 years period, 1985 to 2014. 𝑅𝐺𝐷𝑃𝑡 = 𝐴𝑡𝐸𝑥𝐷𝑡 𝛼𝐸𝐷𝑆𝑡 𝛽 𝐸𝑥𝑅𝑡 𝛾 ……… (3) where α, 𝛽 and 𝛾 are treated as the elasticity coefficients of the external debt service and exchange rate respectively by undertaking a simple manipulation of taking the natural logarithms on both sides, eq (3) is re-written econometrically as: 𝐼𝑛 𝑅𝐺𝐷𝑃𝑡 = 𝐴𝑡 + 𝑙𝑛𝐸𝑥𝐷𝑡 + 𝐵𝑙𝑛 𝐸𝐷𝑆𝑡 + 𝛾𝐸𝑥𝑅𝑡 + µ 𝑡 ………… (4) two periods were observed: pre and post 2005 external debt relief periods. thus, we have 3 possible regression specifications: time period 1985-2005 log 𝑌𝑡 = 𝑎0 + 𝑎1 log 𝑊𝑡 + 𝑎2 log 𝑋𝑡 + 𝑎3𝑍𝑡 … + 𝜇1𝑡 -----------(5) time period 2005-2016 log 𝑌𝑡 = 𝑏0 + 𝑏1 log 𝑊𝑡 + 𝑏2 log 𝑋𝑡 + 𝑏3𝑍𝑡 … + 𝜇2𝑡 ---------(6) time period 1985-2016 log 𝑌𝑡 = 𝑐0 + 𝑐1 log 𝑊𝑡 + 𝑐2 log 𝑋𝑡 + 𝑐3𝑍𝑡 … + 𝜇𝑡 -----------(7) where:𝑌𝑡 = real gross domestic product (rgdp); 𝑊𝑡 = external debt stock (exd); 𝑋𝑡 = external debt service (eds); 𝑍𝑡 = exchange rate (exr); 𝜇𝑡 = error term; 𝑎1 …𝑎𝑛 , 𝑏1 …𝑏𝑛 , 𝑐1 …𝑐𝑛= slopes of the variables for estimation; 𝑎0 , 𝑏0, 𝑐0= constant factors. real gross domestic product is a measure that reflects the value of goods and services produced in a given year. it is used to capture economic growth in this study because it is adjusted for inflation and as such provide a more accurate figure. external debt stock is the amount at which the debt was contracted and it is used as a proxy for capturing external debt burden. external debt service payment is the amount used in repaying the external debt it is also. it is also used as proxy for capturing external debt burden. exchange rate is the price of a nation’s currency in terms of another currency. it is included in the model because it is a macroeconomic indicator and it is also a monetary aggregate in the open economy. real gross domestic product (rgdp), external debt stock (exd) and external debt service payment (eds) were logged due to the large nature of their values. exchange rate (exr) was not logged because it is a rate. the signs of these variables are based on apriori expectation. that is, the www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 3 direction of the relationship between the respective independent variables and the explained variable is according to their relationship in standard economic theory. as such, the following should be expected: a1, b1,c1>0; a2, b2,c2<0; a3, b3,c3>0 3. results and discussion 3.1 chow test estimation result between 1985 and 2005 log (rgdp) = 5.359553+0.028237log (exd) + 0.078189log (eds) +0.001124(exr) t= (46.63572) (0.906126) (2.612029) (1.849598) r 2 1=0.923 rss1=0.080745 with n-p = 21-4 = 8 degrees of freedom. between 2005 and 2016 log (rgdp) = 6.042885+0.221290log (exd)-0.407947log (eds) +0.106639(exr) t= (-0.798684) (0.245013) (-0.918506) (2.237796) r 2 2=0.777 rss2=11.57505 with m-p = 10-4 = 6 degrees of freedom. between 1985 to 2016 log (rgdp) =7.013861+0.063843log (exd)-0.777105log (eds) +0.032633(exr) t= (5.645435) (0.241586) (-3.457135) (6.721853) r 2 =0.666 rss=35.90344 with (n + m – 2p) = 21+10-4 degrees of freedom. in the preceding regressions, the figures in parentheses are the estimated t values and the formula for calculating the f statistics is as thus: 𝐹 = 𝑒1𝑒 − 𝑒1 1𝑒1 − 𝑒2 1𝑒2 /𝑝 𝑒1 1𝑒1 + 𝑒2 1𝑒2 𝑛 + 𝑚 − 2𝑝 where 𝑒1 , 𝑒1 = 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑆𝑢𝑚 𝑜𝑓 𝑆𝑞𝑢𝑎𝑟𝑒𝑠1 𝑒2 1𝑒2= residual sum of squares 2 𝑒1𝑒 = residual sum of squares (pooled) p = number of parameters n = number of observation 1 m = number of observation 2. 3.1.1 testing the similarity of error variances a crucial requirement underlying the usage of chow test and to rely on the result is that the error variances in the regressions 1 and 2 are the same (gujarati and sangeetha, 2007). since we cannot observe the true error variances of group 1 and 2, we can observe their estimates from the rss given in regression 1 and 2. 𝛿 1 2 = 𝑒1 , 𝑒1 𝑛 − 3 = 0.080745 21 − 3 = 0.080745 18 = 0.0044858 𝛿 2 2 = 𝑒2 , 𝑒2 𝑚 − 3 = 11.57505 10 − 3 = 11.57505 7 = 1.6535786 𝐹 = 𝛿 1 2 𝛿 2 2 = 0.0044858 1.6535786 = 0.0027 since the f calculated (0.0027) is not greater than the critical f value (2.80), the null hypothesis of similarity of error variances is not to be rejected. this means that the error variances of the two sub period are statistically the same (that is, the sub regressions are from the same sampled population) and the chow test has been validly used. 3.1.2 discussion of chow test result the computed f value is obtained as follows: 𝐹 = (35.90344 − 0.080745 − 11.57505) 4 (0.080745 + 11.57505) 31 − 8 = 24.247645 4 11.655795 23 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 4 = 6.0619 0.5068 = 11.96 5 per cent critical f value f(4,23)=2.80 since the computed f value 11.96 is greater than the critical f value 2.80, the 2005 external debt relief did significantly caused a change in how external debt, external debt service and exchange rate relate with economic growth in nigeria. the null hypothesis of no structural break between 1985 and 2016 is rejected. the chow test therefore seems to support our earlier hunch that the external debt-economic growth relation has undergone a structural change in nigeria over the period 1985 to 2016 because of the 2005 external debt relief granted to nigeria. it shows that the present external debt of nigeria because of the debt relief has reduced the amount allotted for external debt servicing in the country. this has provided resources to growth enhancing investments in the country. 3.2 regression results table 1: 1985 to 2005 variable coefficient standard error tstatistics probability c 5.359553 0.114924 46.63572 0.0000 log(exd) 0.028237 0.031163 0.906126 0.3775 log(eds) 0.078189 0.029934 2.612029 0.0182 exr 0.001124 0.000608 1.849598 0.0818 source: computation using eviews software r 2 = 0.923377; ṝ 2 = 0.909856; f = 68.28892; dw = 1.107439 table 2: 2005 to 2016 variable coefficient standard error t-statistics probability c -6.042885 7.566057 -0.798684 0.4549 log(exd) 0.221290 0.903175 0.245013 0.8146 log(eds) -0.407947 0.444142 -0.918506 0.3938 exr 0.106639 0.047654 2.237796 0.0665 source: computation using eviews software r 2 = 0.777130; ṝ 2 = 0.665695; f = 6.973852; dw = 2.394464 table 3: 1985 to 2016 variable coefficient standard error t-statistics probability c 7.013861 1.242395 5.645435 0.0000 log(exd) 0.063843 0.264265 0.241586 0.8110 log(eds) -0.777105 0.224783 -3.457135 0.0019 exr 0.032633 0.004855 6.721853 0.0000 source: computation using eviews software r 2 = 0.665763; ṝ 2 = 0.627197; f = 17.26304; dw = 1.784465 3.2.1 discussion of regression results from the results above, the first regression (table 1: 1985-2005) shows that the constant parameter is positively related to real gross domestic product (lrgdp) which implies that when other variables are held constant, the rgdp will increase by the value of 5.359533 units. the result shows that external debt stock (exd) is positively related to rgdp. this conforms to apriori expectation. the implication is that holding other variables constant, a unit increase in exd will lead to increase in rgdp by 0.028237 units. this positive relationship is because as at this period, government spending remained high and much of the projects were financed through external borrowing (adebiyi and olowookere, 2013).however, exd is statistically insignificant at any conventional level (1%,5% or 10%) indicating that exd has no significant influence on economic growth in nigeria. this is because before the debt relief government spending on some important projects were undertaken without sufficient attention being paid either to their economic viability or to the executive capacity of government (adebiyi and olowookere, 2013). the estimated results further showed that there is a positive relationship between rgdp and eds (external debt servicing) indicating that a unit increase in eds will lead to an increase in rgdp by 0.078189 units. this is www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 5 because various debt management strategies and measures were undertaken (adepojuet al., 2007). it also shows that eds is statistically significant at 5 percent level. this result, however, does not comply with the apriori expectation. furthermore, the result indicates positive significant relationship between exchange rate (exr) and economic growth with a coefficient value of 0.01124, indicating that given other variables, a unit increase in exchange rate will lead to 0.001124 units increase in rgdp. this relationship is statistically significant at 10% level. this is because exchange rate has been on an increase and as the naira exchange rate to the dollar increases, import is discouraged and export is encouraged thereby encouraging economic growth (jhingan, 2005). the adjusted r2 of 0.923 shows that 92.3 percent of changes in the country’s real gross domestic product is explained by the model. the durbin watson statistic of 1.107 suggests the presence of serial correlation and the f-ratio of 68.28892 confirms the overall significance of the explanatory variables taken together. table 2(second regression: v2005-2014) shows that the constant parameter is negatively related to real gross domestic product (rgdp) which implies that when other variables are held constant, the rgdp will decrease by the value of 6.042885 units. the result shows that external debt stock (exd) is positively related to rgdp. it reveals that a unit rise in exd will lead to a fall in rgdp by 0.221290 units. the magnitude of exd is slightly larger than experienced in table 1.this positive relationship is because since after the debt relief, available statistics show that the external debt stock of nigeria has been on the increase. this is because of the 2009 global financial and economic crises which was precipitated by the collapse of the sub-prime lending market in the united states (romanus, 2014). as a result the benefits of the debt cancellation which was expected to manifest after a couple of years is wiped up. nonetheless, exd is statistically insignificant at any conventional level indicating that exd has no significant influence on economic growth in nigeria as was shown in table 1 earlier. the result further indicated that there is an inverse relationship between rgdp and external debt service (eds) indicating that a unit rise in eds will cause to fall in rgdp by 0.407947 units. the negative sign displayed by (eds) is contrary to what was exhibited in table 1.nevertheless, eds is statistically insignificant meaning that the eds does not really influence economic growth. this is contrary to earlier report depicted in table 1 where it showed statistical significance. this is attributed to the fact that after the debt relief, nigeria has serviced its external debt with less service cost. the debt relief which was supposed to manifest has been wiped up by the 2009 global financial and economic crisis (romanus, 2014). furthermore, the result in table 2 indicates that exchange rate (exr) has positive impact on economic growth. it shows that a unit increase in exchange rate will lead to 0.106639 unit increase in rgdp. it also shows that exchange rate is statically insignificant. concerning the test of individual significance, most of the explanatory variables did not performed well with the exception of exchange rate (exr). they all failed the t–test of significance at both the 1 percent, 5 percent and 10 percent levels of significance as reflected in table 2 above. this reveals the presence of multicolinearity among the variables in the estimated model. however, the durbin watson (dw) statistic of 2.394 indicates the absence of serial correlation. the adjusted r 2 value of 0.666 revealed that over 66.6 percent of the variation in rgdp was best explained by the independent variables after taking into consideration the degree of freedom. the 3 rd regression (table 3: 1985-2016) suggested that the constant parameter is positively related to real gross domestic product (rgdp) which implies that when other variables are held constant, the rgdp will increase by the value of 7.013861 units. the result shows that external stock (exd) is positively related to rgdp. as indicated, a unit increase in, will lead to increase in rgdp by 0.063843 units. statistically, exd is insignificant at any conventional level as shown in tables 1 and 2. the results in table 3 further indicated that there is an inversely significant between rgdp and external debt service (eds). as shown, a unit increase in eds leads to a decrease in rgdp by 0.777105 units. nonetheless, the sign borne by the parameter estimate of debt service (eds) does conform to the a priori expectation. furthermore, the result indicates existence of positive significant relation between exchange rate (exr) and economic growth. it reveals that a unit increase in exchange rate will lead to 0.032633 unit increase in rgdp. the overall model is statistically significant judging with the results of f-statistics. the adjusted r 2 value of 0.627 shows that 62.7 percent of the total variation is accounted for by the independent variables. the value of the durbin-watson (1. 784) statistics shows that there exist minimal serial or autocorrelation. in the three models, the r 2 were 0.923377, 0.777130 and 0.665763 respectively. this indicates that the independent variables explain the variation in rgdp in the tune of 92 per cent, 78 per cent and 67 per cent respectively. that is 92 per cent, 78 per cent and 67 per cent of the variations in rgdp is explained by the exogenous variables in the three models. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 6 4. conclusion and policy implication this study examined the structural break relationship between external debt and economic growth from 1985 to 2016 with a view to examine the effect of external debt relief on economic growth in nigeria. from the results and analysis, it was concluded that the 2005 external debt relief did significantly cause a change in external debt, external debt service relations with economic growth in nigeria as shown by the chow test. based on these findings, the study suggested that external finance should be used only for projects of highest priority. spending of external debt on productive self-liquidating investments must be strictly adhered to while projects to be financed with external loan must be properly appraised. the government should ensure that the money saved from debt relief is invested in changing the lives of millions of people in nigeria by providing more educational and health facilities and at most provide job opportunities for the growing population. the government should intensify its effort at diversifying the economy so that the increase in exchange rate will encourage economic growth rather than discouraging it. there should be a ban or embargo on importation of some certain goods which the country can produce. hence, firm export promotion and import reduction policies. references adebiyi, w. k., and olowookere, j. k. (2013). managing nigerian debt: the practical solutions. research journal of finance and accounting, 4(19), 75-80. adepoju, a. a., salau, a. s., and obayelu, a. e. (2007).the effects of external debt management on sustainable economic growth and development: lessons from nigeria. munich personal repec archive (mpra), 2147. retrieved from http://mpra.ub.uni-muenchen.de/2147/ bakare, a. s, (2010). debt forgiveness and its impact on the growth of nigerian economy: an empirical study,pakistan journal of social sciences,7 (2), 2-8. clements, b., bhattacharya, r., and quoc, n. t. (2005). can debt relief boast growth in poor countries? international monetary fund (imf), (34), washington dc. ejigayehu, d.a. (2013). “the effect of external debt in economic growth”.journal of the department of economics sodertorn university. ekperiware, m.c., and oladeji, s.i. (2012).“external debt relief and economic growth in nigeria”.american journal of economics.2(7), 195 205. elbadawi, i., a., benno, j., ndulu, c., and njuguna, n. (1997).debt overhang and economic growth in subsaharan africa. in i. zubair, and k. ravi (eds.), external finance for low-incme countries (pp. 49-76). imf. fosu a.k. (2007). the external debt-servicing constraint and public expenditure composition: evidence from african economies, research paper, unu-wider, united nations university (unu) 2007/36, http://www.econstor.eu/handle/10419/63373 jhingan, m. l. (2005). the economics of development and planning.(38 th ed.). 605-616: vrinda publications (p) ltd. gujarati, n., d., and sangeetha.(2007). basic econometrics 4/e.the mc-grawhill companies. omotola, j. s., and saliub, h. (2011). foreign aid, debt relief and africa’s development: problems and prospects, department of political science and public administration, redeemer’s university redemption city, mowe, ogun state, and department of political science, university of ilorin, nigeria. pattillo, c., helene, p., and luca, r. (2004). what are the channels through which external debt affects growth. international monetary fund. romanus, o. o. (2014). external debt crisis, debt relief and economic growth : lessons from nigeria. european journal of business and management, 6(33), 85-88. safdari, m., and mehrizi, m.a. (2011).“external debt and economic growth in iran”. journal of economic and international finance, 3(5),16-25. sulaiman, l. a., and azeez, b. a. (2012).effect of external debt on economic growth of nigeria. journal of economic and sustainable development, 3(8), 66-77. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) contents asian finance & banking review vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business macroeconomic aggregates and retention ratio of quoted firms in nigeria henry waleru akani and yellowe sweneme macroeconomic aggregates and retention ratio of quoted firms in nigeria henry waleru akani1 yellowe sweneme1 1department of banking and finance, rivers state university, nkpolu port harcourt, rivers state, nigeria correspondence: henry waleru akani, department of banking and finance, rivers state university, nkpolu port harcourt, rivers state, nigeria, email: henryakani@yahoo.com received: october 14, 2017, accepted: october 19, 2017, online published: october 26, 2017 abstract this study examined the effects of macroeconomic aggregate on retention ratio of selected quoted manufacturing firms in nigeria for the period 1981 to 2014. the study used secondary data. the technique adopted is the ordinary least squares, error correction mechanism and autoregressive distributed lag (ardl) bounds approach to cointegration. the dynamic short-run estimate revealed that interest rate exerts a negative influence on retention ratio. the study also found that oil price exerts a positive and significant impact on retention ratio. further, it revealed that capital market development exerts a positive influence on retention ratio, but financial sector's development showed a positive relationship with retention ratio, inflation rate appeared with an expected negative sign. foreign exchange rate showed a positive relationship with retention ratio; money supply exhibited a positive influence on retention ratio of quoted firms in nigeria. the error correction coefficients were significant with the expected sign. a long run relationship among the variables was established. thus, the study concludes that macroeconomic variables have a significant influence on dividend policy. we recommend the need for firms to consider the operating macroeconomic framework in formulating dividend policy. keywords: macroeconomic variables, retention ratio, macro. 1. introduction dividend policy refers to the decision of management about the portion of income that is given to stakeholders in the form of dividend and this is an arguable issue for financial managers for decades (toby, 2003). dividend policy is also a critical finance management function that determines the proportion of corporate profit that is distributed to shareholders and the proportion that is retained. it is believed that dividends are highly sensitive to external events such as economic factors within the operating environment. a very important aspect of dividend policy is retention ratio. retention ratio means the proportion of earnings kept back in the business as retained earnings. in other words, it is the percentage of net income that is retained to grow the business, rather than being paid out as dividends to shareholders. despite various reforms, policies, structural changes the performance of corporate organizations remains abysmal and affects the retention ratio of firms. unfortunately, a significant proportion of nigerian firms has no consistent retention ratio policy over the past three decades, as they are largely influenced by unanticipated economic events with pervasive impact on dividend decisions of firms as it relates or affects return on the ratio. also, there is huge scarce literature that identified the macroeconomic determinants of dividend decisions of firms. it is believed that macroeconomic policy directly or indirectly determines the value of firms retention ratio that shareholders desire to plow back. in this case, behavioral finances play an important role in explaining the dividend policy in any organization. miller (1986) presents a traditional argument against behavioral finance by contending that behavioral theories may be able to explain the micro factors, but rational theories suffice to explain the macroeconomic aggregates that determine dividend policy. this suggests that the factor that determines corporate retention ratio remains a matter of debate among scholars. knowledge on the nexus between dividend and macroeconomic variables is crucial to the investors in the equity market as well as to the policy makers. therefore, it is important to examine the relationship between macroeconomic variables and retention ratio of quoted firms in nigeria. 2. literature review dividend policy refers to a company's policy which determines a number of dividend payments and the amounts of retained earnings for reinvesting in new projects. dividend policy has been of great interest to researchers and extensive empirical research has been carried out to identify the potential factors that influence the dividend decision of the firm. however, researchers are still unable to reach a consensus in this regards (kim and jang, 2010). it has remained a puzzle for financial economists (black, 1976). duke, nneji, and nkemare (2015) examined the impact of dividend policy on share price valuation in nigerian banks, based on data from two banks operating in nigeria. they found that dividend yield had a significantly negative effect on share price spyrou (2001) studied the relationship between dividend policy and inflation for the emerging economy of greece. spyrou (2001) in consistent with kaul's results, found that inflation and dividend policy are negatively related to the year 1995, after which the relationship became insignificant. spyrou accredited the change in the relationship to the increased role of monetary fluctuations in line with marshalls (1992) argument, which states that the negative relationship between stock price returns will be less pronounced during the periods when inflation is generated by monetary fluctuations. ralph and eriki (2001) conducted an empirical study on nigerian stock market and found that a negative relationship exists between dividend policy and inflation. however, they also showed that the dividend policies are also strongly motivated by the level of economic activity measured by interest rate, money stock, gdp and financial deregulation. kalyanaraman and al-tuwajri (2014) examined the existence of a long run relationship among five macroeconomic variables of cpi, industrial output, money supply, exchange rate, oil price along with proxy of s&p 500 and the tasi (saudi all stock index). they used monthly data from 1994 to 2013 and applied the time series analysis. they found an existence of a long run relationship among the five variables and all the five variables put an impact on stock price whereas s&p 500 index does not impact saudi stock prices. they also found a two-way causality between stock prices and oil prices they also found that the industrial production shocks push up the stock prices while consumer price index shocks pull the stock price down. mwangi (2013) tries to determine the effect of macroeconomic variables such as real exchange rate, gdp growth rate, the change in money supply (m3), average annual lending interest rates and inflation rate measured by annual percentage changes in the consumer price index (cpi) on financial performance proxied by return on assets (roa) of aviation industry in kenya. the results reveal that roa has a weak positive insignificant correlation with gross domestic products growth rate and annual change in money supply while a weak negative insignificant correlation exists between roa and exchange rate, annual average lending rate and annual average inflation. singh, tripathi, and parashar (2013) examined the primary factors those are responsible for affecting the index (nifty) in national stock index in india. they took exchange rate, insurance intermediation premium (iip), wpi as the independent variable and applied regression analysis and found that iip, exchange rate, and wpi influences the stock prices. abedallat and shabib (2012) examined the impact of macroeconomic indicators like a change in investment and gross domestic product (gdp) as the independent variables and the movement of amman stock exchange index as the dependent variable for the data period of 19902009. for the analysis of the above relationship, they used the multiple regressions. they found a relationship between the two macroeconomic indicators (the investment and gdp) and the amman stock exchange index, and also between each of them separately and the stock index, which means that the movement of prices in the amman stock exchange affected by the movement of these two variables, and there is the effect of both variables on the movement of amman stock exchange index. further, they found the impact of the change in investments was greater than the impact of the change in gdp on the amman stock exchange index. basse and reddemann (2011) examined inflation and dividend policy of us firms and pointed that the neglecting of macroeconomic variables as the important reason why empirical tests often fail to support theories of dividend determination. he found a stable long-run relationship between dividend payments and real economic activity and price level. 3. model and estimation techniques the ordinary least squares (ols) has been successfully used in studies (abedallat and shabib, 2012; singh, tripathi, and parashar, 2013; and amadi, oneyema and odubo, 2000), hence, this technique is employed in estimating the specified equations, while the eviews 9 as a computing platform in the analysis. the study utilized annual time series secondary data (1981 – 2014). all the data set are obtained from the nigerian stock exchange fact book, central bank of nigeria (cbn), and annual reports and statement of accounts. in line with olugbenga (2011), osa and ikaibo (2002), amadi, oneyema and odubo (2000), the regression model takes the form: rr =β0 + β1intr + β2oilp + β3fd + β4cd + β5m2 + β6infr + β7rgdp + β8exr + i…. (1) where: rr = retention rate intr = interest rate oilp = oil price fd = financial sector deepening cd = capital market mos = broad money supply infr = inflation rate rgdp = real gross domestic product exr = exchange rate i = error term βi β8 = coefficient of the independent variables β0 = regression intercept 4. empirical results and analysis we present and analyze the estimated short-run model based on some goodness of-fit criterion, such as akaike information criterion (aic) and schwartz information criterion (sic) for selection of lag length in a model, hence; it is presented in the table below; table 1: short-run estimated result showing the effects of macroeconomic variables on dividend policy indices in nigeria variable δrr c -8.712443 (-0.340313) δintr -26.07145 (-5.129213)* δintr(-1) -4.901002 (-1.338707) δintr(-2) -7.099566 (-1.751070) δoip 1.378985 (3.242073)* δoip(-1) 1.424468 (3.075754)* δoip(-2) 2.485007 (4.534692)* δcd 0.002173 (0.268275) δcd(-1) -0.026711 (-2.392656) δcd(-2) -0.011735 (-0.435949) δfd 2.136948 (0.362346) δfd(-1) 18.50266 (1.822995) δfd(-2) 10.22963 (2.465365)* δinfr -0.005405 (-0.004556) δinfr(-1) -1.839189 (-1.030609) δinfr(-2) -0.697949 (-0.676941) δrgdp 14.59239 (2.827198)* δrgdp(-1) 18.72948 (2.626467)* δrgdp(-2) -37.52078 (-3.727010)* δexr 2.665646 (1.236714) δexr(-1) -2.192780 (-1.236992) δexr(-2) 5.856717 (2.386177)* δmos 9.170141 (3.623753)* δmos(-1) 4.854979 (2.577289)* δmos(-2) -0.041259 (-0.025766) ecm(-1) -1.540177 (-7.039320)* r-squared 0.972314 f-statistic 7.023826 (0.019475)* durbin-watson stat 1.294621 breusch-godfrey test 0.398060 (0.7025) source: eviews 9 computation note: t-statistic in parenthesis ( ), *indicates significance at 5% the above error correction model shows that the coefficient of determination (r2) was significantly high. that is, the selected macroeconomic variables explained 97% changes in retention ratio. also the overall regression was significant at 5%. the error correction coefficients have the expected sign and relatively high, though rr is significant. the a priori of the signs of explanatory variables in the rr equation were correctly sign, except one and two-period lag capital market development, current period exchange rate, lag two exchange rate and money supply respectively. rr responds negatively and significantly to current-period interest rate; it also responds positively and significantly to changes in oil price, two-period lag financial deepening also showed a positive and significant influence on rr, real gdp growth appeared positive and significant, exchange rate appeared positive at current period and lag two-period, though significant only at lag two, while money supply appeared with a positive and significant sign at current period and lag-one period respectively, this confirms the economic believe that the dependence of a variable on another is rarely instantaneous, but responds with a lapse of time (gujarati, 2004). this is an indication that certain economic indices do not reflect in dividend policy, and economic policies are not satisfactorily used in the direction of increasing shareholders returns. this finding may not be unconnected with the lack of prudence in the utilization of dividends. in sum, the result reveals that dividend policy indices in the period under review in nigeria does adjust fairly to changes in macroeconomic variables. test for serial correlation in essence, we employed the durbin-watson (dw) test for autocorrelation, it is based on the assumption underlying the ordinary least squares (ols), that the error term (μ) is assumed to be uncorrelated. the breusch-godfrey test shows evidence that the residuals are uncorrelated. 4.1 test for perfect multicollinearity table 2: test for multicollinearity intr oip cd fd infr rgdp exr mos intr  1.000000 oip -0.076909  1.000000 cd -0.018704 -0.389686  1.000000 fd  0.042121 -0.356406  0.642279  1.000000 infr  0.026434  0.095067 -0.315252 -0.361966  1.000000 rgdp  0.077516  0.115997  0.391266  0.349791 -0.206831  1.000000 exr  0.306915 -0.370523  0.753070  0.577952 -0.228009  0.421499  1.000000 mos  0.362128  0.113533  0.112204 -0.009332 -0.120845 -0.168355  0.018838  1.000000 source: author’s computation using eviews 9 software from the table 2, apart from the diagonal, the correlation between variables is not unity; this implies that the explanatory variables have no exact or perfect relationship. 4.2 test for model stability figure 1: model stability test for retention ratio model the cusum tests are used in this study to test for parameter stability, our graph shows that the plots of the residuals remain within the 5% critical bounds, therefore, we can accept that the parameters of the model are stable. 4.3 test for residual normality the jarque-bera (jb) test of normality is adopted in this study, purely to verify whether the residuals are normally distributed. it is conducted under the null hypothesis that the residuals are not normally distributed. from illustration below; the computed ρ value of the jb statistic (0.100786) under the normality assumption, we, therefore, reject the hypothesis that the error terms are not normally distributed. the diagram below shows that the residuals from the regression seem to be symmetrically distributed. figure 2: normality test for retention ratio model 4.4 test for heteroscedasticity table 3: test for heteroscedasticity heteroscedasticity test for retention ratio f-statistic 0.550246 probability 0.8792 obs*r-squared 12.81713 probability 0.7483 source: author’s computation this test is conducted using white’s test, which involves either an auxiliary regression with no cross-terms or with cross terms. it also follows the f-distribution, from the table 3, since the ρrobability of f-value 0.8792 for retention ratio is not significant, we, therefore, conclude that there is homoscedasticity, that is to say, the variances are equal. 4.5 unit root stationarity test table 4: unit root stationarity test a time series yt is integrated of order d, denoted i(d) if ∆dyt is stationary. then the series yt has d unit roots.to further ascertain the the stationarity of the data series, hence; table 4: augmented dickey-fuller (adf) unit root test of stationarity results test variables levels differences order of integration tstatistic critical tstatistic critical adf rr -8.904988 -3.653730 i(1) intr -6.384610 -3.661661 i(1) oip -5.877960 -3.646342 i(0) cd -6.677589 -3.653730 i(1) fd -5.726112 -3.661661 i(1) inf -5.730629 -3.670170 i(1) rgdp -4.369344 -3.646342 i(0) exr -6.006878 -3.653730 i(1) mos -7.185088 -3.653730 i(1) note: * implies significance at 1% source: author’s computation based on data from central bank of nigeria publications according to maddala (1992), testing for unit roots is a formalization of the boxjenkins approach of differencing the time series after a visual inspection of correlogram. the analyzing and testing for unit root naturally lead to the theory of cointegration (iyoha and ekanem, 2002). the summarized result presented in table 4 shows that at various levels of significance (1%, 5%, and 10%), all the variables were stationary, specifically, oip and rgdp are integrated of order zero, i(0), whereas rr, intr, cd, fd, inf, exr, and mos are integrated of order one, i(1). hence, all the variable in this study is stationary. 4.6 ardl bounds tests for cointegration table 5a: bounds test for cointegration analysis critical value lower bound value upper bound value 1% 3.15 4.43 5% 2.55 3.68 10% 2.26 3.34 source: pesaran et al. (2001) ardl bounds test test: test statistic value   rr equation f-statistic 5.466722 table 5b: ardl results for cointegration analysis source: author’s computation using eviews software pesaran and shin (2001) showed that cointegrating systems can be estimated as ardl models; it has the advantage to estimate cointegrating relationship on variables that are either i(0) or i(1). according to pesaran et al. (2001), the asymptotic distribution of the f-statistic is non-standard regardless of whether the regressors are i(0) or i(1), and provide two adjusted critical values that establish lower and upper bounds of significance. 4.7 interpretation given a computed f statistics value of 5.466722 for rr equations, the results of the bounds co-integration test, therefore, establish that the null hypothesis against its alternative is rejected at the various significance level. the computed f-statistic is greater than the lower and upper critical bound values at 1%, 5% and 10% respectively, thus indicating the existence of a steady-state long-run relationship among the variables. this suggests that the various selected macroeconomic variables have a long run relationship with dividend policy indices in nigeria. 5. concluding remark this study is an attempt to investigate macroeconomic variables and dividend policy of quoted firms in nigeria. the overall results suggest that retention ratio responds to the dynamics of the macroeconomic environment; especially from interest rate, oil price, financial sector development, capital market development, foreign exchange rate, monetary policy instrument of money supply and the magnitude of growth in the economy, other check variables like inflation rate appeared with a slight stimulus on retention ratio. our result supports the outcry for firms to consider the existing macroeconomic environment, as essential to achieving quite good dividends policy. in this line, chen, roll, and ross (1986) showed that in the united states, dividends have a strong relationship with macroeconomic variables. this study also supports the scholarly work of olugbenga (2011) that the impact of macroeconomic indicators such as money supply, interest rate, exchange rate, inflation rate, oil price and gross domestic product have varying impact on stock prices of firms in nigeria. this confirms that the dynamics in monetary policy and the oscillation in the external sector have an unpredictable influence on dividends policy of quoted firms in nigeria. our long-run estimate is similar to basse and reddemann (2011), based on the established long-run relationship found between dividend policy indices and the macroeconomic variables. remarkably, this study concludes that a long run relationship exists between retention ratio and the macroeconomic variables. these conclusions also offer valuable indications to policy makers when determining retention ratios, by considering the macroeconomic environment where the firm exists. therefore, the need for firms to consider the operating macroeconomic framework in formulating dividend policy is recommended from this study. references al-abedallat, a.z., & al-shabib, d.k. 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(2010).a diagnosis of the determinants of dividend payout policy in nigeria: a factor analytical approaches. american journal of scientific research, 8, 57-67. onoh, j.k.,(2002).dynamics of money banking and finance in nigeria: an emerging market. astra meridian publishers, aba, enugu, lagos. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. 55 63 _1542294018.bin _1542294022.bin -15 -10 -5 0 5 10 15 90929496980002040608101214 cusum5% significance 0 1 2 3 4 5 6 7 8 9 -70-60-50-40-30-20-1001020304050 series: residuals sample 1984 2014 observations 31 mean -3.40e-14 median 1.987776 maximum 47.66404 minimum -61.85958 std. dev. 20.97054 skewness -0.551083 kurtosis 4.529183 jarque-bera 4.589512 probability 0.100786 copyright © cc-by-nc 2019, cribfb | afbr asian finance & banking review; vol. 3, no. 1; 2019 issn 2576-1161 e-issn 2576-1188 research article published by centre for research on islamic banking & finance and business, usa 1 collision of npls on the financial performance of commercial banks: a case study of ethiopia hailu megersa tola dean college of business and economics ambo university ethiopia d. guna sankar department of accounting and finance ambo university ethiopia abstract credit risk in banking relates to the possibility that loans will not be paid or that investments will deteriorate in quality or go in to default with resultant loss to the bank. this is the most obvious and most important risk to the banking industry in terms of potential losses. credit risk is not confined to the risk that borrowers are unable to pay; it also includes the risk of payments being delayed, which can also cause problems for the bank. in order to protect their own interest and the wealth of bank depositors, banks need to investigate and monitor the activities of the will be and existing borrowers. adequately managing of those risks related with credit is critical for the survival and growth of any financial institution. the present case study projects the effects of non-performing assets on the financial performance of commercial banks in ethiopia. keywords: commercial banks, effects, ethiopia, financial performance, npls. 1. introduction a non-performing loan is a loan that is in default or close to being in default. banks face different elements of risk that require to be identified measured and managed. managing these risks is a process by which one identifies the risk, measures and quantifies the risk and develops strategies to manage the risk. the banking industry is facing different types of risks associated with its functions. but according to van gestel & baesens (2009), credit risk has been the most principal and perhaps the most important risk type that has been present in finance, commerce and banks too. credit risk has been defined from different perspectives by different researchers and organizations. most researchers agreed with the definition given by basel (1999) who defines it as the potential that debtor or counterparty default in satisfying contractually predetermined obligation according to the agreed up on terms. because failure of trading partner to repay its debts in full can seriously damage the affair of the other partner, credit risk always has been the vicinity of career throughout the world (achoo & tenguh, 2008). according to zewude (2011), for banks, the issue of credit risk is of even of greater concern because of the higher level of perceived risk resulting from the loan book which is the largest asset for any commercial bank. even though credit creation is the main income generating activity for commercial banks, it involves a huge risk to both the banks and the borrowers. 2. statement of the problem banks are exposed to risks like credit, market, operational, interest rate and liquidity risk. the appropriate management of these risks is a key issue to reduce the earnings risk of the bank, and to reduce the risk that the bank becomes insolvent and depositors cannot be refunded. banks use deposits of their customers to generate credit for their borrowers, which in fact is a revenue generating activity for the banks themselves. this credit creation process exposes the banks to a high default risk which might lead to financial distress including bankruptcy. the banks can either choose from the proposed options or employ their own as long as it gives sound and fair results. the importance of the credit risk management and its impact on performance has motivated researcher to pursue this study. the research assumes that if the credit risk management is sound, the performance (profit level) was satisfactory. the other way around, if the credit risk management is poor, the performance (profit level) was copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 2 relatively lower. the central question is how significant is the impact of credit risk management on performance (profitability). 3. objectives of the research  the general objective of this study was to assess the impact of npls on the performance of selected commercial banks in ethiopia.  to analyze the impact of credit risk management on the performance of the bank.  to determine the relationship between credit risk management and performance in terms of profit for the commercial banks in ethiopia. 4. hypotheses of the research throughout the research, the following two hypotheses were tested.  h1: non-performing loan ratio (nplr) has significant impact on the performance of commercial banks in ethiopia.  h2: capital adequacy ratio (car) has significant impact on the performance of commercial banks in ethiopia. 5. significance of the research it was show the impact of npls on bank performance; it was give a motivation to other researchers to conduct a research about the npl‟s practices in the commercial banks and it was useful for financial institutions by providing information about npls. 6. scope of the research in ethiopia, there were banks which give service in number twenty one. this study was limited to a manageable of five banks in commercial banks of ethiopia and even if there were different problems which need investigation, the aim of the study was to to assess the impact of npls on the performance of selected commercial banks in ethiopia. these researches were limited on the measure of the performance of commercial banks in terms of credit risk management under the selected sample. the study was employ non-performing loan ratio/nplr/ and capital adequacy ratio/car/ as the measuring instruments of credit risk management and return on asset /roa/ as indicator of performance in terms of profit. 7. limitations of the research the researcher limited this study to only five commercial banks; the study was limited to 10 years of bank data and the study was based on secondary data only. the researcher decided to limit this study to commercial banks of ethiopia namely, awash international bank, bank of abyssinia, nib international bank, dashen bank and commercial bank of ethiopia. these banks have been selected with criteria taken as the five banks from other banks expected to have more than ten years of experience on the lending activities. 8. sampling design the researchers selected five major commercial banks in ethiopia and collected the necessary data from each bank. those data was collected from national bank of ethiopia annual report from 2007 to 2016, and used for regression purpose. the reason why the researcher purposively selects five banks is, to have more observations. for those banks with 10-year life span is selected. therefore, there are 50 observations in the regression analysis. 9. source of data and data collection instrument the main source of data for the study was found from the audited balance sheet and income statement of five purposively selected banks. from those banks, 10 consecutive years of balance sheet and income statement report were used for the study. in our country it‟s a must for banks to submit its annual report to the nbe not only that they are supposed to submit their off balance sheet too. so the researcher„s easily gets annual reports of all selected banks from the nbe. 10. data analyzing instrument the data collected from the annual reports of the banks were analyzed using multiple regression analysis: the relation of one dependent variable to multiple independent variables. the regression output was obtained using statistical package for social sciences (spss 20 version). 11. model specification in this study, multiple regression models with two independent variables were used. to measure for financial performance i.e. roa (net income/total asset): for credit risk management are nplr (non-performing loans/total loans) and car] respectively. 12. inferential analysis of commercial banks in ethiopia 12.1 diagnostic tests here the researcher used regression command for handling the regression. this is followed by the output of these spss commands. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 3 table 1 variables entered/removedb model variables entered variables removed method 1 car, nplra . enter a. all requested variables entered. b. dependent variable: roa source: spss regression out put table one shows the variables entered or variables removed from the study at any point of time from the beginning till the end of the work. as it is explained the variables entered in column two are independent variables of the study i.e., capital adequacy ratio and non-performing loan ratio. since there was no variable removed from the study, variable removed column is free. the last column shows the method that was used by the researcher, enter method was used to remove or enter the variables. all variables are entered on the above table. the dependent variable which is return on asset explained in the bottom of the table. table 2: linearity of the variables model summaryb model r r square adjusted r square std. error of the estimate change statistics r square change f change df 1 df 2 sig. f change 1 .422a .178 .143 .00571 .178 5.080 2 47 .010 a. predictors: (constant), car, nplr b. dependent variable: roa source: spss regression out put table 2; demonstrates about large r, which shows the multiple correlation coefficients and the correlation between the observed and predicted values of the dependent variables. and the value of r for models produced by the regression procedure range from 0 to 1. the larger the value of r display that there is strong relationship among observed and predicted value. in our case r is 0.422. r square tells us, how much of variance in the dependent variable is explained by our independent variable. so, in our case we were known how much nplr and car explained by roa. as of r and the value of r square ranges between 0 and 1, beside to that small value indicates that the model does not fit the data well. as the table indicates, the independent variable explained the dependent variable by 17.8%. this means that our model using two predicted variables (nplr & car) explain about 17.8% variance of our dependent variable (roa). right next to r square we get adjusted r square. if we had small sample size the r square value in the sample tend to be a little over estimated and little optimistic over estimation of what probably really happening in the population. so, adjusted r square corrects this value to provide a better estimation of what actually happening in the population. in our case adjusted r square is .143. standard error of the estimate this is basically gives an idea of how much our prediction might be off. if the number is large the more variability it indicates from the table, we have standard error of the estimate (0.006) which is very small and good. r square is significant at 5 % level of significance as the se <.05. table 3: anova table anovab model sum of squares df mean square f sig. 1 regression .000 2 .000 5.080 .010a residual .002 47 .000 total .002 49 a. predictors: (constant), car, nplr b. dependent variable: roa source: spss regression out put anova, table summarizes the output of the analysis of variance. in regression row, the output for regression displays information about the variation accounted for by the existing model. residual displays information about the variation that is not accounted for by the model. and total in the table shows the sum of regression and residual. mean square is the sum of squares divided by the degrees of freedom. and f statistics is the regression mean square copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 4 divided by the residual mean square. if the significance value of the f statistics is small, then the independent variable does a good job in explaining the variation in the dependent variables. table 4: collinearity diagnostics test table collinearity diagnosticsa mode l dimension eigenvalue condition index variance proportions (constant) nplr car 1 1 2.561 1.000 .01 .06 .01 2 .387 2.574 .03 .92 .05 3 .052 7.005 .96 .02 .94 a. dependent variable: roa source: spss regression out put table 5 is a table which displays statistics that help to determine whether there are any problems with collinearity or not. collinearity (multicollinearity) is the undesirable situation where the correlations among the independent variables are strong. eigenvalues proved an indication of how many different dimensions are there among the independent variables. when several eigen values are close to zero, the variables are highly interring correlated and small changes in the data values may lead to large changes in the estimates of the coefficients. condition index are the square roots of the ratios of the largest eigenvalue to each successive eigenvalue. a condition index greater than 15 indicates a possible problem and an index greater than 30 suggests a serious problem with collinearity (spss output). even if eigenvalues are used for checking the existence of collinearity, the best way is conditional index. so in this research case, since conditional index value scored around 1, 2 and 7, from this ground the researcher can say that there is no multicollinearity among independent variables. table 5 residuals statistics residuals statisticsa minimum maximum mean std. deviation n predicted value .0186 .0331 .0280 .00260 50 residual -.01952 .01035 .00000 .00559 50 std. predicted value -3.609 1.973 .000 1.000 50 std. residual -3.416 1.812 .000 .979 50 a. dependent variable: roa source: spss residual out put table 6, tells about the residual and predicted value. for each case, the predicted value is the value predicted by the regression model and for each case; the residual is the difference between the observed value of the dependent variable and the value predicted by the model. residuals are estimate of the true errors in the model, if the model is appropriate for the data, the residuals should follow a normal distribution. standardized predicted values are predicted values standardize to have mean 0 and standard deviation of 1. in short standardize residuals are ordinary residuals divided by the sample standard deviation of the residual and have mean of 0 and standard deviation of 1. 12.2 test of normality of residuals one of the assumptions of linear regression analysis is that the residual is normally distributed, at the mean of zero and standard deviation of one. all of the results from the examiner command suggest that the residual or the error terms are normally distributed. the skewness and kurtosis are near to 0. as one can observe from the histogram and p-p plot it looks normal. based on these results, the residuals from this regression appear to conform to the assumption of being normally distributed. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 5 figure: 1. histogram (test of normality) source: spss regression out put figure: 2 normal p-p plot of regressis on tandardized residual source: spss regression out put the above figures show whether the data are normally distributed or not. the error term should be normally distributed at the mean of 0 and standard devotion 1, here in this model the mean is approximately 0 and the standard devotion is 0.979 approximately 1, so the model is normally distributed. the researcher watched from the histogram and from the pp plot too. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 6 12.3 relationships between roa and nplr figure 3: scatter diagram for roa vs. nplr source: spss regression out put the scatter diagram above shows the negative relationship between the two variables hence a negative gradient. this confirms the coefficient of the nplr of the variable in the regression equation and hence non-performing loans is good indicator of return on asset from the above results. the points are closely clustered at one point. this may indicate the nature of performance of the bank and the level of shareholding and if the institution is public listed or private companies. the nature of relationship does not give a positive relationship to the whole banking sector in this research analysis. 12.4 relationship between roa and car figure 4: scatter diagram for roa vs. car from the scatter diagram above the points along the line of the best fit are observed to have a big dispersion in regard to the line. the positive points make line look like horizontal reducing the gradient/slope between the two variables. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 7 12.5 descriptive analysis of commercial banks in ethiopia the relationship between credit risk management and profitability at cb of ethiopia graph 5 scatter diagram for roa, car and nplr of commercial bank of ethiopia from the above graph it‟s that observed the relations between roa, nplr & car of commercial bank of ethiopia. when nplr reaches its maximum at (15), roa reaches its minimum at (2). this means that 15% from the total loan are non-performing or default to be paid by the bank customer. so an increase trend of roa indicates that the profitability of the company is improving. conversely, a decreasing trend means that profitability is deteriorating. so, 2% indicates a deteriorating profitability of cb of ethiopia. during (2007-2008) cbe have low performance regarding credit risk management in terms of (nplr) and from (2009-2016) dramatically decrease and roa is above nplr this shows that cb of ethiopia manages its default loan properly and the profit of the bank also increase dramatically. car of commercial bank of ethiopia indicate normal trend throughout the years. 12.6 the relationship between credit risk management and profitability at boa graph 6the relationship between credit risk management and profitability at boa scatter diagram for roa, car & nplr of bank of abyssinia from the above graph were observed the trend of roa, nplr & car for bank of abyssinia. during 2008 nplr reaches its maximum with 9.8 % this shows that from the total loan 9.8 % default to be paid by the customer. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 8 nplr shows a zigzag trend from 2008-2013 and it has decrease initially. finally from 2014-2016 it decreases at an increasing rate. in recent year the trend shows boa has managed its nplr. from this trend were observed that when the number of nplr reaches its maximum roa reaches its minimum from our sample of 10 years of data. roa is greater than nplr from year 2012 this shows boa was managed its default loans properly. car shows high trend which means that boa kept high capital for risk weighted sum for bank assets. the relationship between credit risk management and profitability at aib graph 7 scatter diagram for roa, car &nplr of awash international bank from the above graph were observed the relations between roa, nplr & car of awash international bank like other banks, aib have bad nplr from (2007-2010) years but it decreases continuously from (2011-2016) as the above figure indicated. roa is below nplr from (2007-2010) and above nplr from (2011-2016) this indicates that awash international bank have managed its nplr properly during years. car of awash international bank is little to high relative from the above mentioned banks. the relationship between credit risk management and profitability at nib graph 8 scatter diagram for roa, car &nplr of nib international bank the above graph shows the relation between roa, car & nplr of nib international bank. nib has relatively lower nplr when compared to that of the other banks. from (2007-2010), nplr is above roa and from (2011-2016) roa is greater than nplr. nib has managed its default loan properly. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 9 car of nib are very high like other private banks the relationship between credit risk management and profitability at db graph 9 scatter diagram for roa, car &nplr of dashen bank the above graph shows the relation between roa, car & nplr of dashen bank dashen bank nplr is low from year (2007-2016). this shows that the bank managed loan properly. it should be a good example for other banks regarding loan management. car of dashen is high like other private banks. 13. findings of the research  this study shows that there is a significant relationship between performance (in terms of profitability) and credit risk management (in terms of loan performance and capital adequacy). the results of the analysis states that nplr have negative and significant effect whereas car have positive and relatively significant effect on roa, with nplr having higher significant effect on roa in comparison to car. the regression as a whole has significant result; this means that nplr is reliably predicted of roa but car has relative low significant prediction.  from the data analyzed above, the relationship of the three variables i.e. roa, car, and nplr well explains the credit risk management on the performance of selected institutions. since banks take deposits and use the same to advance loans the costs associated with these loans e.g. insurance costs reduce the profitability margins of the bank.  return on asset (roa) measures the ability of the bank management to generate income by utilizing company assets at their disposal. therefore, increased portfolio at risk will reduce the revenue aspect and increase the cost associated as indicated by the analysis of nonperforming loans.  the output from the regression analysis. first of all, let„s looks the p value of the f test to see if the overall model is significant or not (from model summery table 2). with the p value of 0 to the four decimal places, the model is statistically significant. the r square is 0.178 meaning that approximately 18% of the variability of roa is accounted for by the variables in the model. the coefficient for each of the variables indicates the amount of change one could expect in roa given a one unit change in the value of that variable, given that all other variables in the model are held constant. for example, let„s consider the variable nplr (coefficients table 4); the researcher would expect a decrease of -.075 in the roa score for every one-unit increase in nplr, by assuming that all other variables in the model are held constant.  here the researcher answer about the two predictors, whether they are statistically significant and if so the direction of the relationship. (from table4) the effect of nplr (non-performing loan ratio) which is (beta = -.075, p 0.012) is significant and its coefficient is negative indicating that the greater the non-performing loan ratio the lower the profitability of commercial banks in ethiopia. if the nplr is high lower profitability of banks. this result also makes sense, because both the theoretical and empirical evidences „support that too. the effect of capital adequacy ratio is also (car, beta = 0.042) significant (p, 0.061) and as watched it is positive and p value greater than 0.05 which indicates that car have relatively low or insignificant effect on roa. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 10 14. conclusion and recommendation the purpose of this chapter is to review the whole thesis and highlight future researcher directions. the next section displays recommendation made by the researcher for all concerning issues. conclusion  the main objective of this study was to assess the impact of credit risk management on the performance of selected commercial banks in ethiopia, for the sample period of ten years i.e. 2007 to 2016.  the study concluded that nplr had a statistically significant effect on the level of roa. however, the results of this multiple regression model revealed that car has no significant effect of on the level of roa.  there was no correlation among independent variables (nplr and car) which means each of the independent variables explained the dependent variable separately.  there was no collinearity (multicollinearity) among independent variables.  non-performing loan ratio have negative impact, on the other hand capital adequacy ratio have positive impact on profitability of selected commercial banks in ethiopia.  finally, from the data analyses, non-performing loans and capital adequacy ratio have shown that there exists a relationship between credit risk management and the performance of selected banks. but car has relatively lower effect on measuring the performance of selected banks. an increase in nplr increases the credit risk of banks. recommendation based on the findings and conclusions of the study the following recommendations are given.  the bank management needs to be cautious in setting up a credit policy that will not negatively affects profitability and also they need to know how credit policy affects the operation of their banks to ensure judicious utilization of deposits and maximization of profit.  banks should establish credit policies and standards that confirm to regulatory requirements and the bank's overall objectives to further reduce the level of their credit risk exposure (unprotected).  banks are advised to provide adequate training in terms of their credit policies and standards to their employees who are working in loan disperse department.  this study could be further developed by including more independent variables to the regression model and increasing the sample size.  it is better if this study is supplemented with qualitative study of credit risk management so that the findings would be more objective and informative.  performance indicator could be developed by adding other relevant dependent variable to grasp (understand) the whole variations in performance.  finally, the study suggests that a further study should be done on the impact of credit risk management on different aspects of banks' activity. references achou, f. takang and tenguh c. ntui (2008), “bank performance and credit riskmanagement”, university essay from högskolaniskövde/institutionenförteknikochsamhälle; 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vol. 2, no. 1; 2018 issn 2576-1161 e-issn 2576-1188 published by centre for research on islamic banking & finance and business 30 a synthesis of corporate social responsibility concept, as a mechanism to enhanced organizational reputation in nigeria nasiru saidu 1 1 department of business administration, bauchi state university gadau, nigeria correspondence: department of business administration, bauchi state university gadau, nigeria. email: nasirinta@gmail.com. tel: +234 803 5905206 received: january 20, 2018 accepted: january 23, 2018 online published: january 29, 2018 abstract the connection between corporate philanthropy and firm has strong controversial issues. more so, corporate philanthropy is frequently criticized as an agency cost since it may serve narrow an administrative self-interests. as a society additionally concerned with their environment, organizations have started to transform their activities as a response to deal with the public new concerns. the corporate philanthropy is no doubt an important and attractive case to follow since it brings up quite specific and pronounced ethical issues like environmental resolution. the paper examines crs using personal observations, dealing with some company‟s managers, employees and environmentalists, and library research with a view to finding out whether crs principles can bring a positive impact to the organization. based on this study, was discovered that, business firms recognize and practice corporate philanthropy designed to address social development obstacles in nigeria. the paper therefore recommends that, organizations have to develop a diversity of policies for treating this interesting of community wants and desires, the natural environment, with consequent business imperative and esteem on how intensely and well they are coordinating social responsibility move toward into both policy and routine operations. keywords: corporate philanthropy, corporate governance, organizational reputation, stake holders, nigeria. 1. introduction it is important to know that, corporate philanthropy generate firm value and strong repetition in the eyes of society. in current years, customers, suppliers, employees, society, governments, and a number of stake-holders have confidence on business to carry out extra activities in corporate social responsibility (csr) as mechanism to build their reputation. most of the business has responded to these concerns by devoting some of their resources to csr. otherwise some companies' managers have resisted, in opposition that additional investment in csr is inconsistent with their efforts to maximize profits. it is therefore an attractive and important area of research as conceivably one of the significant and controversial aspects of the fashionable debate surrounding this area. as a society turns to be more worried with the natural surroundings, businesses firms have started to adapt their performance as a response to deal with society‟s new anxiety. the corporate philanthropy is no doubt an important and attractive case to follow since it brings up quite specific and pronounced ethical issues like environmental resolution. therefore organizations have to develop a diversity of policies for treating with this interesting of communal wants and desires, the natural surroundings, as well as consequent business imperative by means of esteem on how intensely and how healthy they are integrate philanthropic approaches keen on both policy and routine operations. furthermore a firm ignores to overlook the environment issues in which it transacts their business. consequently, here is a need to scrutinize the influence of crs on firm‟s productivity in nigeria in its more grounded structure, the idea of csr declares so as to partnerships have an compulsion to consider the interest of clientele, shareholders, workers, society, and also the natural "impression" in all parts of their operations. organizational reputation resulting from corporate philanthropy may be an insubstantial strategic resource that increases firm value (bergstrom and diedrich, 2011) similarly (fombrun et al. 2010). however, some organization scholars argue that, corporate philanthropy is primarily an agency cost because it wastes organization resources on social welfare that contributes tiny to firm value (friedman, 1970; jensen, 2002; masulis & reza, 2015). corporate www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 31 philanthropy according to this agency theory view may be a response to social pressures to uphold managers‟ social status in best circles (galaskiewicz, 1997). many scholars argue that corporate governance mechanisms which comprised ceo, board monitoring, compensation, and ceo power plays a crucial roles in balancing the relationship among corporate philanthropy and firm value. going by organizational theory, corporate governance research views that firms can align ceo incentives with shareholder interests through compensation contracts and monitoring mechanisms (daily, dalton and cannella, 2003). first, a compensation system that rewards long-term firm value may stimulate ceos to use corporate philanthropy to increase firm values to the society that both managers and shareholders benefit in the future (conyon, 2006). while one of the board's fundamental obligations is to screen management, outside executives who hold too numerous directorships in different firms may get to be distracted and lose their focus on the central firm (fich and shivdasani, 2006). the subsequent monitoring inadequacies may entice managers to utilize corporate philanthropy in a narrow and self-intrigued way, along these lines contributing little to firm value (cennamo et al., 2009). 2. research problem nigeria is a country blessed with abundant human and material resources that have been managed by government and some local and global organizations, for them to have some advantages of the resources to provide some amount of utility to its customers through providing various products with the purpose of fulfilling its mission or goal. over 70% of these resources are managed by some global and local organizations in which they contribute to the decrease of citizenry welfare by pollutant their environment, killing their roads, reducing their electric power, but most of those organizations are not considering the wellbeing of civilization by taking responsibility for the impact of their activities; their main concern is how to make as much money for their stockholders as possible. whereas organizations supposed to be willingly taking additional steps to improve standard of living for employees & their families with the local neighborhood & society in general. moreover since most nigerians witness the failure of governments in providing some essential need, therefore it is an advantage by the organization to fill some gaps which will help them to enhance their brand image and reputation in which a strong standing in ecological & social business be able to help business firm to construct trust increase sales & consumer reliability, above all study shows to facilitate customers cannot only buy a good products he want but want to be acquainted with that what they purchased was produced in a communally & environmentally accountable means. 3. research methodology the methodology used in the preparation of this paper is to study the library with the document content analysis method. additional information is obtained from various documents and references to the official website of the relevant agencies. the study also uses content analysis method to data obtained from the literature scholar, newspaper and website in question. the information obtained is used to view the corporate social responsibility concept, as a mechanism to enhanced organizational reputation in nigeria. this paper also stems from personal observation on how organizations are taking csr as waste of company resources, more so, their main concern is how get out and sell more product/services to make profit line. after basic examination of the devastating effects of this act, the author considered proffering answer for the problem as a result of which some observation were made with some companies‟ managers, employees and environmentalists. the author utilizes these as a part of expansion desk research to build up the paper. effort was made to concoct workable recommendations that can spare the unsafe circumstance. 4. literature review it should be noted from the beginning that corporate social responsibility crs no universally accepted definition, some see csr as simply charity by a dissimilar name, while some sees as an efforts organization make beyond its rule of existence to achieve the equilibrium needs of stakeholders with the need to improved their productivity and make a profit. corporate social responsibility is the ongoing commitment by business to perform morally and bestow to economic improvement though improving the standard of living of the labor force and their families as well as of the local neighborhood and society in general. (holmes, l., and r. watts 2000). the notion “corporate social philanthropy” has been distinct in variety of ways by different authors on social philanthropy observe the idea as a nature of a business firm to display “evangelist rather than "employed contender" state of mind towards the general public. (holmes and watts 2000:19) representing global business council for sustainable improvement give a reasonable envoy description as: the continued dedication by business to perform morally and help to economic growth while improving the standard of living of the workforce, their relatives as well as those of the local neighborhood and society in general. in a influential findings carroll (1979, p. 500) delivered corporate philanthropy as build that „„incorporate the monetary, legitimate, moral, and optional desires that the general public has with organizations at a provider in a known point in time.‟‟ based on his description, carroll contended that these obligations are execute for the business firm‟s purpose as well as for society in general. this www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 32 implies that businesses by their extremely presence be able to be seen as going into a communal get so as to commits the partnership to take the wellbeing of society keen on thought when deciding (andreasen and drumright, 2001). the build csr has four closely connected aspects – monetary, legitimate, moral standard and charitable –which business firms endeavoring to accomplish every one of the four at all circumstances. in view of these parts, a socially capable firm have to endeavor to create a advantage, obey with the law, be ethical, and be a polite corporate citizen‟'' (carroll, 1991, p. 43).‟ “the social philanthropic firms incorporates the ethical, discretionary expectations that the environment needs an organization at a given in period of time”. caroll (1979:98). 17  legal, the legal responsibility means that the business firm has to its society to comply with the rules and regulation that “engage in recreation by the rules of the game”. (lantos 2001:6).  ethical responsibility grasps the scope of principles, models with desires that reproduce a anxiety for what customers, workers, share-holders and the group of people observe as fair, now or in custody with respect for or defense of stakeholders moral human rights. caroll, (1997:100).  economic, a business firms financially duty to the overall population involves creating products and ventures that society needs and setting them at a reasonable value that society needs and acknowledges. the products and enterprises must meet of value standard.  discretionary responsibilities are absolutely intentional and frequently guided by the individual estimations of a person inside an organization. they go past the legitimate and are not for the most part expected in moral sense. caroll's description remains a helpful reason for investigation as it consolidates the basic parts of an association's duty to society. conceptualization of csr (see carroll, 1999 for a study) ranges from a wide point of view of csr ''as exercises that appear to further some social great, past the interests of the firm furthermore, that which is required by law'' (mcwilliams and siegel, 2001, p. 117) to one that is scarcely connected with on boosting shareholder wealth (goodpaster, 1991) these ascertained assortments reflect distinctive degrees of obligation credited to a firm past its part as an economic establishment (hemphill, 1997). in this review, the more broad societal perspective is gotten, portraying csr as the association's ''status and activities'' as for its responsiveness to its obvious societal duties (brown and dacin, 1997, p. 68) as they apply to all association accomplices. under this definition, an association is resolved to make a move to ''guarantee and improve both the welfare of the overall population all things considered and the energy of a business'' (davis and blomstrom, 1975, p. 6). as express by (andrews 1977:43), the idea of corporate social responsibility can be explained as the intellectual and objective anxiety that oblige people regardless of how profitable, and leads them toward the constructive commitment to human advancement. luttons and hodget (1976: 24) distinguished it as the way to follow those strategies, to implement judgment, or to follow these lines of actions which are alluring as far as goal and estimation of the general public. the significance role of csr goes beyond a company‟s simple charitable work. in some study, more than 69% of managerial personnel believed that csr practices could be a competitive strategy for their business (barber& venkatachlam, 2013), this aspect goes ahead of the simple social activity like educating people regarding a cause or promoting a social campaign (eagle et al., 2013). therefore, it to be sure dovetails the tourism firms' csr practice with social marketing subsequent to impacting individuals conduct is the center primary concern of social marketing (andreasen, 1994). also, it parallels kotler and roberto‟s (1989, p. 6) argues that social marketing is „„a prearranged effort carryout by one group (the agent of change), which expects to induce other to acknowledge, modify, or desert certain thoughts, attitudes, practices, and behaviors.‟ as the definition of csr explains, one area of csr is to improve the quality of group, individuals and society wellbeing. in a different way affirmed that regardless of the way that organizations may accomplish their own marketing benefits through csr association, it goes with the fundamental component of social marketing that its essential center is on doing good and advancing social benefits (rangun and karim, 1991). as a standout amongst the most widely recognized area for social marketing effort (kotler et al., 2012), sightseeing businesses also put a major emphasis on pro environmental efforts because the environment is a vital component in attracting consumers (knowles, macmillan, palmer, grabowski, & hashimoto, 1999). strategy researchers, conversely, contend that corporate philanthropy may positively add to firm esteem since it permits firms to accumulate resources that are hard to obtain or develop (barnett, 2007; godfrey, 2005). this strategic perspective proposes that firm esteem is made when corporate philanthropy results in an asset blessing that is important, uncommon, and costly to-imitate for competitors (barney, 1991; dierickx and cool, 1989). from this strategic perspective, corporate philanthropy may pick up firm value when it supports organizational goals (smith, 1994) or increase the firm‟s competitive context (porter & kramer, 2002). this may be the case when philanthropic investments create intangible resources (surroca et al., 2010), such as firm reputation www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 33 (fombrun & shanley, 1990), trust with customers (lev et al., s u and sauerwald 52010), employee satisfaction (edmans, 2012), and positive stakeholder relationships (su & tsang, 2015; wang & qian, 2011). stakeholder theory and csr a convincing contention behind why business is roused to devote in csr activities originates from the area of stakeholder theory (argandona, 1998; freeman, 1984; harvey and schaefer, 2001; post, 2003). stakeholder theory proposes so as to hierarchical continued existence with achievement be dependent upon on fulfilling equally its economic (e.g. profit maximization) and non-financial (e.g. corporate social execution) targets via addressing the requirements of the organization's different stakeholders. previous findings in the field of stake holder administration express the stake holder in a business firm as any group of peoples who can influence or is influenced by the accomplishment of the organizations (freeman, 1984, p. 46). principal stakeholder groups comprise of customers, suppliers employees, plus shareholders and investor, community entities for example, government or other open associations so as to set laws plus manage financial business and rule economic business (clarkson, 1995), and exchange affiliations and ecological groups (donaldson and preston,1995). in outline, stakeholder theory proposes so as to organizations are spurred toward expand their goals to incorporate different objectives notwithstanding benefit profit maximization. in view of this theory, much company‟s grasp a corporate social responsibility agenda as a way to advance socially competent behavior also approaches, furthermore, sufficiently act in response to partner needs (maignan and farrell, 2004). incentive for satisfying stake holders requirements drives from the way that treatment to partner needs can be corresponded through an organization continued existence, monetary affluence, upper than economic well-being, competitive benefit, and the advancement of trust also reliability among its focused on clients (mitchell et al., 1997). corporate social responsibility development in nigeria nigerian government have furthermore through its needs policy (nigerian national planning commission 2004) place the setting by characterizing the personal division business position as by expressing so as to "the personal division are required toward storm up and additional practical in creating dependable jobs, increasing their profitability, more, improving the standard of living quality to its citizenry . more so anticipated that increased socially competent by allocating resources into corporate social responsibility and communal improvement of nigeria. furthermore an international compress network was legitimately launched in nigeria during the 12th annual nigerian economic summit in abuja in 2006 where some nigerian organizations have effectively signed on to the international compact. moreover an international compress system was formally established in nigeria through 12 th yearly nigeria economic meeting in abuja 2006 in which a number of nigerian business. where by nigerian oil division ruled by international organizations. to recompense for the government‟s supremacy failure to ensure self particular business intrigues, the organizations frequently participate in social philanthropy. the historical backdrop of formal corporate social responsibility in nigeria can be followed rear to the crs practices in the oil and gas multinational by means of the concentrated on helping the impacts of their withdrawal exercises on the local communities. the organizations gives healing facilities schools, and funnel borne waters, commonly these activities are specially appointed and not generally supported (amaeshi, adi, ogbechie & amao, 2006). 5. findings in the process of the research, the synthesis of corporate social responsibility concept, as a mechanism to enhanced organizational reputation in nigeria, the following are the findings arrived:  failure by organizations to engaged in corporate social responsibility has certainly plays a vital role to enlarge incidence and consequences of disagreement among business firms and their host community and consequently on their performance and productivity.  most of the organizations are taking corporate social responsibility as an agency cost only few of them take crs as an obligation to its host community.  most of the business management‟s failed to watch major principle of corporate social responsibility do have influences on the incidence and occurrence of injure and other unfavorable courses on its host neighborhood.  that effectual monitoring and assessment via all stakeholders of industry communities helps significantly to decrease the occurrence of the company dealing corporate social responsibility with lightheartedness.  finally the finding also indicates that investment in corporate social responsibility helps companies to increase ability to attract & retain employees. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 34 6. recommendations  the first findings express that failure by organizations to engaged in corporate social responsibility has certainly provide a vital position to enlarge incidence and consequences of disagreement between business firms and their host communities and consequently on their performance and productivity.the rationale behind the idea business organization only concern its profit maximization for its share holders be supposed to be erase and turn into out of date and thus be supposed to forecast on the prominence to a newer word “corporate philanthropy. more over companies should willingly take additional ladder to get better the excellence of life for workers & their families as well as the local neighborhood & civilization at large trough providing benefits for employees & improve the quality of life in the workplace beyond economic & legal requirements.  consider the second findings most of the organizations are taking corporate social responsibility as an agency cost only few of them take crs as an obligation to its host community. nigerian organizations should continuously carry out corporate social responsibility projects and they should carry it out adequately and appropriately in order to ensure sustainability, profitability and a high increase in efficiency, thus, they will absolutely help the organization to increase their sales and customer loyalty. previous findings shows that customers will not want high-quality and safe products alone additionally needs to know what he buy was produced in a socially and environmentally accountable way. furthermore its commitment to corporate social responsibility will help in achieving its predetermined goals and objectives.  most of the business management‟s failed to monitor key a standard of corporate social responsibility does contain influences on the incidence and occurrence of injure and other unfavorable courses on its host neighborhood. the government should collaborator with these organizations to ensure that organization management observes key principles of corporate social responsibility in order to guarantee efficiency in organization its social responsibility activities. with no endanger corporate survival; businessmen should understand the advantages of charitable grants to college‟s hospitals institutions and to its host group of people, to talk about a few. business organizations ought to understand so as to an expansion in the entrepreneur strength of the population can merely be advantageous to the business division and that the legislature cannot do this all by you.  that effectual monitoring and assessment by all stakeholders of business communities helps significantly to decrease the occurrence of the company dealing with corporate social responsibility with levity. the host community leaders/heads or elders pioneers and shareholders ought to insure timely and efficient monitoring or supervision the activities of the companies in their community through this monitoring will help them become more acquainted with the concept of corporate social responsibility. and also seminar and frequent meetings observed by all stakeholders with the aid of the government and legislations on corporate social responsibility this would keep the diversification of funds by the organization for unapproved purposes like illegal business practices.  lastly the finding reveals that investment in corporate social responsibility helps companies to increase ability to attract & retain employees. therefore the nigerians organizations should continuously consider the interest of their host communities by making impact to their activities that will increase their standard of living, through that will help the organization to keeping up with competitors and anywhere the marketplace is, and also to attract and retain a productive employees. 7. conclusion this study demonstrate that corporate social responsibility has accepted as new significant and relevance to an organization productivity and competitive advantages. in the process of the study various literature have been review and shows a number of win-win outcomes and number of organizations are perceived that their csr opens door for enhancing their opportunity to improved their productivity, reduce operating cost/ increase operational efficiency, enhance brand image & reputation, increase sales and customer loyalty, potentially reduce regulatory oversight, increase ability to attract & retain employees and also keeping up with competitors & where the market is etc. the study additionally demonstrated that the way to achievement in by means of any type of modernization to a company‟s benefit from the csr point of view is to correspondence by means of local community establishment, the push and most outstandingly, the universal public that stands to achieved from such initiative. it is well and appropriate that additional organizations are taking part in csr connected activities nowadays, obviously, yet persons that promote the reality are receiving the rewards as far as enhanced their productivity too. references andreasen, a. and m. drum wright: 2001, _alliances and ethics in social marketing_, in a. andreasen (ed.in ethical issues in social marketing (georgetown university press, washington, dc). www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 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(2015). product diversification and financial performance: the moderating role of secondary stakeholders. academy of management journal, 58, 11281148. sethi s. prakash (1979), “a conceptual framework for environmental analysis of social issues and evaluation of business response patterns”, academy of management review, vol. 4 (1), pp. 63-74. wang, h., & qian, c. (2011). corporate philanthropy and corporate financial performance: the roles of stakeholder response and political access. academy of management journal, 54, 1159-1181. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) asian finance& banking review; vol. 2, no. 2; 2018 issn 2576-1161e-issn 2576-1188 impact factor: 3.3 published by centre for research on islamic banking & finance and business 33 evaluating loan loss provisioning for non-performing loans and its impact on the profitability of commercial banks in bangladesh fakir tajul islam assistant professor faculty of business administration eastern university, bangladesh e-mail: ftiprince_gb@yahoo.com received: december 1, 2018 accepted: december 15, 2018 online published: december 21, 2018 abstract through the collection and disbursement of money, banks often face the risk of default of the loan. these nonperforming loans (npls) should be identified and cared for avoiding vulnerability to other risk. banks may mitigate this risk using loan loss provisioning (llp). using the aggregate data of 56 commercial banks in the last 9 years (2009-2017), this study attempts to evaluate the impacts of llp maintained for npls on profitability, as it may help to take the level of the llp, and npls in the optimum level of business success. the dependent variables used in this study are non-interest income to total assets and net-interest income to total assets as a representative of the profitability of a bank. the dependent variables are analyzed using least square multiple regression on three independent variables, which were gross npl to total loans outstanding, loan loss provision maintained, and surplus/ (shortfall) resulted from the required loan provisioning. the result showed that the profitability is very significantly influenced by the independent variables. npls and llps maintained by the commercial banks negatively related with the profitability of the business, especially llps shown statistical significance to impact on profitability negatively. it is better to take the llps and npls in the minimum level for maximum profitability of banks. keywords: loan loss provisioning, non-performing loans, profitability, commercial banks, bangladesh 1. introduction commercial banks do business as an intermediary between depositor and borrower, more specifically; they collect money in exchange of interest on the deposited money and lend the money to other businesses, individuals with interest. the difference between the interest earned and interest paid is the profit or loss for a bank. banks played important role in economic development through this intermediation service. there is always a chance to be not paid by the borrower as an installment for repaying the borrowed money. and it necessitates the mitigation tools and techniques to report and adjust with the operation smoothly. nowadays, the level of non-performing loans (npls) has been soaring in bangladesh. npls are those selected assets from which bank cannot generate any incoming cash flow as loan repayment installment. in many cases, borrowers become default and the full amount of the loan cannot be recovered. to manage and safeguard the banking business from the npls, different credit policies are used, one of those is to increase the loan loss provisions (llps). llps are used as a cushion to adapt to the expected loss resulted from the missed payment of installment on a bank’s loan portfolio; it is interchangeably known as provision for bad debts (ozili& outa, 2017).when a bank can predict a loan loss, it needs to be charged to the income statement as “provision” to set a loan loss provision (llp) account to be shown on the balance sheet. if the principal and interest on a loan becomes bad debts, the amount of the loan balance is decreased by charging it to the llps which was kept as a reserve on the balance sheet (angklomkliew et al., 2009). the banks normally keep www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 34 requisite provisions against their unclassified and npls from their operating profits in a bid to mitigate financial risks (islam, 2018). it is important to know that the level of loan loss provisioning able to safeguard the profitability of commercial banks in bangladesh. as there are many instances that the banks, especially the government owned banks has been facing a large of amount non-performing loan, against which the management of those banks has to maintain large amount of loan loss provision. 2. related literature review and research focus in this section, the usage and concept of llps, npls, and profitability are reviewed based on the literature on relevant researches across the world. nlps and llps are the two major transmission channel to give a macroeconomic shock to balance sheet of banks (monokroussos et al., 2016), as these are the key contributor for resulting fluctuation in the profitability through earnings and capital management (hoggarth & pain, 2002). among the many indicators to understand the strength of lending activity, nlps to total loans and llps to total loans are widely used to measure the credit risk of a bank (radivojevic & jovovic, 2017). lending activity is the major contributor to the profitability and success of banking business in any domain of the world. norden & stoian (2013) conducted a study on 85 dutch banks to examine the relationship between earnings and risk management. they found that the dutch banks use loan loss provisioning (llp) to manage earnings volatility in the banks. the banks usually increase the level of llps when the earnings level is higher, and decrease llps to adapt with low regulatory capital ratios. in nigeria, ozili (2015) investigated banks in nigeria which focused from 2004 to 2013 period, which reveals that loan loss provisioning largely used for earning smoothing. similar findings also noticed in a few other researches (taktak et al., 2010, curcio et al., 2014, curcio & hasan, 2015). packer and zhu (2012) did a study on 240 banks of different countries to investigate the loan loss provisioning practices for income smoothing operation with a data set of 2000-2009 time frame. they found that the used of llps is also for countercyclical loan loss along with income smoothing. loan loss provisioning is also used for capital management along with income smoothing as it is a tool to mitigate and caution the risk of default (perez et al., 2008). so llps used for income smoothing, which is a practice for managing profitability. there few studies which found opposite findings as stated earlier. bryce et al. (2015) tested the relationship among the income smoothing, capital management and the cyclical hypotheses on vietnamese banks, but they did not find any significance to use llps for income smoothing. acar and ipci (2015) investigated the role of llps for managing capital and earnings of banks from 2005 to 2011, focusing 28 turkish banks. they found the use of llps for profitability in the form of earning management but this scenario changed during the financial crisis. abdul adzis et al. (2016) explored the impact of llps on income smoothing on the banks in hong kong. their study revealed that llps are used to smooth income but it decreased after the use of ias 19. leventis et al. (2011) found the use of llps to signaling purposes, along with capital enhancement and income management. their study was on 91 eu banks who adopted ifrs standards. the adoption of accounting standard caused the change of finding. their study revealed that the use of llps to income smoothing was reduced after enacting ifrs into the banks. curcio, de simone, and gallo (2017) did a study on the use of discretionary llps for income smoothing and profitability. the banks were studied when a financial crisis was in progress; the banks were facing deterioration in loan quality. their study found that these characteristics caused significant loss of profitability. they also found evidence for income smoothing via llps. if the life of a loan is considered, from the sourcing of a loan to the payment of the last installment, there will be a chance of loss always. these losses played a major role in determining the profitability of a bank in the long-run, as the major income generating assets is loan and advances. rahman (2013) opined that the llps may not influence the profitability of a bank in the long run, but it affects the timing of loan losses. he also emphasized on the number of provisions, where a higher provision can cause lack of profitability at present but shifted the future, in case of lower llps, the level of profitability will prevail at present by shifting it from future. for profitability analysis, different measures of evaluation were used in the different study across the world. to represent profitability return of equity, return on assets and earnings per share were used to find out their changes due to the changes in the net liquidity gap on some selected banks in bangladesh (islam & hasan, 2015). islam, et al (2013) had used earnings per share as the agent of performance as well to analyze the performance of banks in bangladesh. based on the above literature review outcomes and relevant discussions, it may become useful to give effort to understand and evaluate the llps for npls for their impact on profitability in the banking system of bangladesh. so the objective of this empirical study is to understand the llps maintained for npls by the commercial banks in bangladesh and then to estimate and evaluate the impact of the llps along with npls, on the profitability of banks. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 35 it will show us the relationship between loan loss provisioning and profitability in the form of impact analysis and can be used for finding future direction of research in the field of finance and banking. 3. research data and methodology this study is a quantitative form of research. the data used in this study is mostly historical data. the data used in this research is aggregate data of 56 commercial banks operating in bangladesh. there are 9 variables used in this study which are collected from the financial stability report of 2010-2017 published by the financial stability department. so the data used in this study has a time frame of 09 years starting from 2009 to 2017. figure 1. conceptual framework of impact analysis on profitability by llp along with nlps . as shown in the above figure, the study has identified two separate segments of profitability of a commercial bank, one is non-interest segment which are not related to loans and advances and the other one is net-interest segment which directly related to loans, npls, llps. for a commercial bank, income can be generated from two different sources, firstly through interest income and secondly, non-interest income from investment in other assets except loan and advances. for this reason, the model to be analyzed is twofold as follows noita= 𝜶 + 𝜷𝟏 ∗ 𝑵𝑷𝑳𝑻𝑳 + 𝜷𝟐 ∗ 𝑳𝑳𝑷𝑴 + 𝜷𝟑 ∗ 𝑺𝑺𝑹𝑳𝑷 + 𝜺……………………………………………………. (1) here, the depended variable is the non-interest income to total assets (noita), which is the proxy for the profitability of the banking sector in bangladesh. the independent variables are gross npl to total loans outstanding (npltl), loan loss provision maintained (llpm), and surplus/(shortfall) resulted from the required loan provisioning (ssrlp), and the error terms. niita= 𝜶 + 𝜷𝟏 ∗ 𝑵𝑷𝑳𝑻𝑳 + 𝜷𝟐 ∗ 𝑳𝑳𝑷𝑴 + 𝜷𝟑 ∗ 𝑺𝑺𝑹𝑳𝑷 + 𝜺…………………………………………………...... (2) here in the second model, the dependent variable changed to net-interest income to total assets (niita). it is changed to find out the direct impact on the loan and advances which is the major sources of income of a bank for ensuring profitability and successful business venture. the independent variables are as same as used in the model1. net-interest income is calculated by subtracting interest expense from interest income. the data analyzed using descriptive statistics and ordinary least square regression method is used to determine the effect of dependent variables on the independent variables in the regression equation. there are also some used of tables and charts for understanding the initial part of this research on llps, npls and profitability. 4. research findings and analysis in the analysis part, the key terms of the research are explored form the historical data and analyzed using tabular and graphical analysis. later the impact analysis is discussed and then it forwarded to the evaluation of the current state of llps, npls, and profitability of banks in bangladesh. 4.1 descriptive statistics of the variables used in the study for profitability analysis, there are various financial ratios to use and there are different measures of npls and llps are also available. in the following table, there are three measures of profitability listed which includes roa, roe, niita, noita, and nim. indipendent variables dependent variables impact analysis llp practices along with nlps on profitability of banking business noita npltl llpm ssrlp niita npltl llpm ssrlp www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 36 table 1: descriptive statistics of the variables n minimum maximum mean std. deviation bad loans to gross npls (%) 9 66.70 87.00 78.9444 6.17781 doubtful loans to gross npls (%) 9 5.40 14.20 9.0222 2.98989 interest income to total assets (%) 9 5.40 8.10 6.7589 .93766 provision maintained (in millions crore bdt) 9 137.80 375.30 2.3372e2 82.87965 net interest margin (nim) 9 1.70 3.05 2.3267 .53388 netinterest income to total assets (niita) 9 1.50 2.50 1.9178 .42349 non-interest income to total assets (noita) 9 2.20 3.40 2.7567 .34409 gross npl to total loans (%) 9 6.20 10.00 8.7111 1.24544 operating profit before provision ((in billion bdt) 9 116.25 246.50 1.9439e2 36.76938 return on assets (roa) 9 .60 1.72 .9778 .39185 return on equity (roe) 9 7.80 19.89 12.2389 4.71644 required provision 9 134.70 443.00 2.5813e2 105.89509 sub-standard loans to gross npl (%) 9 7.50 19.10 12.0333 3.44565 valid n (listwise) 9 source: author’s analysis using spss v16.0. for npls, there are four variables listed which include bad loans, doubtful loans and sub-standard loans to total npls, npls to total loans outstanding by the all banks in banks in bangladesh. for llps, there are two variables, includes required provisions as per the amount of npls, provision maintained. in the later analysis, all the variables cannot be accommodated due to the simplicity of the research. 4.2 llp, npl and profitability in the banking sector in bangladesh the amount of npls was downward from 2008 to 2011, and then it went up for the year 2012 (figure 2). from 2013, the npls percentage of total loans has been a bit stable between 8 to 10 percent of the total loans outstanding by the banks in bangladesh. the lowest percentage found in 2011, which was 6.2%. then it soared up a bit before stabilizing to this current state. figure 2. npls as a percentage of total loans outstanding during 2008 to 2017 (bangladesh bank 2018) 0 2 4 6 8 10 12 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 % o f to ta l l o an s years npls to total loans www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 37 the npls is classified into three categories by the central bank of bangladesh. if a loan remains outstanding for 6 months, it is marked as “sub-standard (ss)” while for 9 months and 12 months of outstanding loans, classification are “doubtful (df)” and “bad loan (bl)” respectively. even the range of what could be called a bad loan was narrowed down through the new regulation which has put three months’ outstanding loans in ss category, six months’ outstanding in df and nine months’ outstanding in bl categories (tuhin, a. 2018). in the following figure (figure 3), the progression of the three types of npls are depicted figure 3.non-performing loans (npls) composition during 2008 to 2017(bangladesh bank 2018) under the existing bangladesh bank regulations, the banks have to keep 0.25 percent to 5.0 percent provisions against general-category loans, 20 percent provision against substandard category, 50 percent against doubtful loans and 100 percent against bad or loss category (islam, s. 2018; tuhin, a. 2018). table 2: banking sector loan provisions (in millions crore taka) source: financial stability reports 2010-2017(bangladesh bank, 2018) the above table (table 4) gives an indication that the banks could not keep their llps in the required level in most of the last ten years. in some years, the difference between the required llps and llps maintained is large enough to alarm for taking safety measures. so the above two tables showed that the npls caused llps and in most of the years from 2009 to 2017, the required llps could not be made. moreover, the llps can cause lack of profitability as the bad debt and its provision may increase operational expenses and weaken the balance sheet by reducing its reserve on the provision. as it is shown in the following table (table 3), in the years of llps shortfall, the profitability indicators were weak enough for the influence of the llps caused by nlps. 0 10 20 30 40 50 60 70 80 90 100 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 % o f n p ls years sub-standard loans doubtful loans bad loans year required provision provision maintained surplus/(shortfall) 2009 134.7 137.8 3.1 2010 150.8 146.8 (3.9) 2011 139.3 148.9 9.6 2012 242.4 189.8 (52.6) 2013 252.4 249.8 (2.6) 2014 289.6 281.6 (8) 2015 308.9 266.1 42.8 2016 362.1 307.4 (54.7) 2017 443 375.3 (67.7) www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 38 table 3: profitability of banking sector of bangladesh (in percentage) source: financial stability reports 2010-2017(bangladesh bank 2018). the above table indicates that the measure of profitability is giving mixed performance level which meant the assets and equity are not good enough for the high level of performance, but the other measures have good indication of profitability. there are many issues underlies for the mixed result of performance. 4.3 test of impacts of llps for npls on profitability for a commercial bank, income can be generated from two different sources, firstly through interest income and secondly, non-interest income from investment in other assets except loan and advances. for this reason, the model to be analyzed is twofold as follows niita= 𝜶 + 𝜷𝟏 ∗ 𝑵𝑷𝑳𝑻𝑳 + 𝜷𝟐 ∗ 𝑳𝑳𝑷𝑴 + 𝜷𝟑 ∗ 𝑺𝑺𝑹𝑳𝑷 + 𝜺……………………………………………………(1) here, the depended variable is the non-interest income to total assets, which is the proxy for the profitability of the banking sector in bangladesh. the independent variables are gross npl to total loans outstanding (npltl), loan loss provision maintained (llpm), and surplus/(shortfall) resulted from the required loan provisioning (ssrlp), and the error terms. model-1 summary model r r square adjusted r square std. error of the estimate 1 .886 a .785 .656 .20175 a. predictors: (constant), surplus/(shortfall), gross npl to total loans outstanding, provision maintained source: author’s analysis using spss v16.0. as it is shown in the model-1 summary, it indicates that the independent variables are highly correlated with the dependent variable and it is 0.886 (the ‘r’ value). based on the r square value, 78.50% variation in the dependent variable is explained by the gross npl to total loans outstanding (npltl), loan loss provision maintained (llpm), and surplus/(shortfall) resulted from the required loan provisioning (ssrlp). anova b model sum of squares df mean square f sig. 1 regression .744 3 .248 6.090 .040 a residual .204 5 .041 total .947 8 a. predictors: (constant), surplus/(shortfall), gross npl to total loans outstanding, provision maintained b. dependent variable: non-interest income to total assets source: author’s analysis using spss v16.0. years roa roe net interest margin operating profit before provision (in billion bdt) 2009 1.38 19.86 2.59 116.25 2010 1.72 19.89 3.05 170.92 2011 1.3 14.3 3 186.8 2012 0.6 7.8 2.8 197.3 2013 0.9 10.7 2.1 186.1 2014 0.7 8.1 1.8 212.7 2015 0.8 9.4 1.7 216.9 2016 0.7 9.7 1.9 216 2017 0.7 10.40 2.00 246.50 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 39 the regression model-1 predicts the variation of the dependent variable, significantly well, as it has an acceptable level of significance to be statistically significant and good fit for the data. coefficients a model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 3.567 .578 6.171 .002 gross npl to total loans outstanding -.014 .070 -.050 -.198 .851 provision maintained -.003 .001 -.626 -2.087 .041 surplus/(shortfall) .003 .004 .291 .942 .390 a. dependent variable: non-interest income to total assets source: author’s analysis using spss v16.0. the analysis of coefficients shows how much influence is exerted by the independent variables, namely the gross npl to total loans outstanding (npltl), loan loss provision maintained (llpm), and surplus/(shortfall) resulted from the required loan provisioning (ssrlp) on the dependent variables, non-interest income to total assets. the first two variables showed negative relationship with the dependent variable. among the independent variables only loan loss provision maintained (llpm) found statistically significant. thus the regression equation now become as follows noiita= 𝟑. 𝟓𝟔𝟕 + (−𝟎. 𝟎𝟏𝟒) ∗ 𝑵𝑷𝑳𝑻𝑳 + (−𝟎. 𝟎𝟎𝟑) ∗ 𝑳𝑳𝑷𝑴 + (𝟎. 𝟎𝟎𝟑) ∗ 𝑺𝑺𝑹𝑳𝑷 + 𝜺……………………….(1) in the earlier model, the dependent variable was non-interest income to total assets (noiita ), now in the second model, the dependent variable change to net-interest income to total assets (niita ) to find the strength of influence of the same independent variable used in model-1, to influence a dependent variable which is directly related with the loan and advances, non-performing loans (nlps) and loan loss provisioning (llp). the model-2 designed as follows niita= 𝜶 + 𝜷𝟏 ∗ 𝑵𝑷𝑳𝑻𝑳 + 𝜷𝟐 ∗ 𝑳𝑳𝑷𝑴 + 𝜷𝟑 ∗ 𝑺𝑺𝑹𝑳𝑷 + 𝜺…………………………………………………….(2) as stated earlier, that the second model has one change in the dependent variable but the other variables are the same as model-1. after testing the variables in the spss v16.0, the results found as follows. model -2 summary model r r square adjusted r square std. error of the estimate 2 .907 a .823 .717 .22543 a. predictors: (constant), surplus/(shortfall), gross npl to total loans outstanding, provision maintained source: author’s analysis using spss v16.0. as it is shown in the model-2 summary, it indicates that the independent variables are highly correlated with the dependent variable and it is 0.907 (the ‘r’ value). based on the r square value generated in the test, 82.30% variation in the ‘net-interest income to total assets’ is explained by the three independent variables. the adjusted r square value is found very useful which is “71.70 percent”. the model-2 showed the findings noteworthy enough in comparison to model-1. though both models are aimed at a same set of independent variables. the regression model-2 predicts the variation of the dependent variable, also significantly well, as it has an acceptable level of significance (0.25) to be statistically significant and good fit for the data. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 40 anova b model sum of squares df mean square f sig. 2 regression 1.181 3 .394 7.744 .025 a residual .254 5 .051 total 1.435 8 a. predictors: (constant), surplus/(shortfall), gross npl to total loans outstanding, provision maintained b. dependent variable: netinterest income to total assets source: author’s analysis using spss v16.0. the analysis of coefficients shows how much influence is exerted by the new dependent variable on the three independent variables. coefficients a model unstandardized coefficients standardized coefficients t sig. b std. error beta 2 (constant) 4.026 .646 6.232 .002 gross npl to total loans outstanding -.135 .078 -.396 -1.717 .147 provision maintained -.005 .001 -.889 -3.266 .022 surplus/(shortfall) -.005 .004 -.363 -1.294 .252 a. dependent variable: netinterest income to total assets source: author’s analysis using spss v16.0. in this model-2, based on the value of coefficients, the first two variables showed the negative relationship with the dependent variable again. among the three independent variables, only loan loss provision maintained (llpm) found statistically significant which is the same as model-1. neita= 4.026 + (−0.135) ∗ 𝑵𝑷𝑳𝑻𝑳 + (−0.005) ∗ 𝑳𝑳𝑷𝑴 + (−0.005) ∗ 𝑺𝑺𝑹𝑳𝑷 + 𝜺………………………….(2) in both regression models, the association of independent variables with the dependent variable has shown statistical significance. among the independent variables, loan loss provision maintained (llpm) found statistically significant to explain the variation in non-interest income to total assets (model-1) and in net-interest income to total assets (model-2). 5. conclusion the evaluation of the research findings showed that the level of npls was favorable during 2008 to 2011, and from 2013, the npls percentage of total loans has been a bit stable between 8 to 10 percent of the total loans outstanding. the banks could not keep their llps in the required level in most of the last ten years. in some years, the difference between the required llps and llps maintained is large enough to alarm for safety measures. the measure of profitability is giving mixed performance level which meant the assets and equity are not good enough for the high level of performance, but the other measures have a good indication of profitability. there are many issues underlies for the mixed result of performance. with taking care of it, the relevant authorities should try to minimize it to ensure better profitability. the high percentage of npls caused high llps and it can reduce profitability as found in the study. based on the findings and evaluation, it is found the research could be more in-depth with adding more literature and variables. so it creates scope for further research on this research topic. references abdul adzis, a., abdul adzis, a., tripe, d. w., tripe, d. w., dunmore, p., & dunmore, p. 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(2013). loan loss provisions: purpose, desirability and necessity. retrieved from http://businessnews24bd.com/loan-loss-provisions-purpose-desirability-and-necessity/ [accessed on december 10, 2018] taktak, n. b., zouari, s. b. s., &boudriga, a. (2010). do islamic banks use loan loss provisions to smooth their results? journal of islamic accounting and business research, 1(2), pp. 114-127. tuhin, a. k. (2018) of bad loans and bad reporting. retrieved from www.dailysun.com/post/292720/2018/03/03/of-bad-loans-and-bad-reporting [accessed on december 10, 2018] copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) copyright © cc-by-nc 2019, cribfb | asfbr asian finance & banking review; vol. 3, no. 2; 2019 issn 2576-1161 e-issn 2576-1188 published by centre for research on islamic banking & finance and business, usa 1 macroeconomics needs fresh methodology of theorization bijan bidabad b.a., m.sc., ph.d., post-doc. professor, economics and chief islamic banking advisor, bank melli, iran e-mail:bijan@bidabad.com abstract in this paper, we try to analyze the macroeconomic reasoning in different methodological issues. subsequently, we try to touch some current macroeconomic debates on aggregations, relations, monetary and real sectors analyses. we assess that what we know about the behavior of macroeconomic variables is just our understanding from empiricism, and we have rarely found the laws of linkages among macroeconomic variables. we also conclude that successive theories have an intuitional foundation. it seems that to improve macroeconomic theories and policies, we need to be redirected to basic philosophical thinking about the macroeconomic theoretical foundation and try to rebuild a new concrete base for macroeconomics. keywords: macroeconomics, methodology, theorization. 1. introduction despite the existence of a long history in the realm of macroeconomic theorization, it seems that this important area of economic analysis needs fresh methodological bases. at the micro level of analysis; the characteristics of the phenomenon is more or less under the eyes of the investigator. he actually looks at micro-phenomena as a small specimen that has billions of similars. he can think about the similarities and dissimilarities of micro-phenomena to find some hypothesis or conjectures for explaining their behaviors. but, the same does not exist at the macro level of analysis. at this level, observations are aggregated; samples are not mainly similar; they are not numerous, and constructing hypothesis comes from sense and feeling not scrutinized investigation. generally, microeconomics is the study of individual economic units and their interactions and is often contrasted with macroeconomics, which is concerned with the behavior of economic aggregates. 2. macroeconomic methodology generally, the macroeconomic methodology uses four main streams of methodological thinking. let's introduce them as;  micro foundation presuppositions  meso (micro-macro) foundation presuppositions  intuitional foundation presuppositions  macro analytic methodology the first category is often called "neoclassical synthesis" because, in a simple, general equilibrium setting, the framework appears to be consistent with the traditional microeconomic analysis in terms of supply and demand. behavioral equations at the macro level are obtained by adding up the behavioral equations of individuals whose information about market events is limited to prices. the second category more or less inspires from some implications of "robinson crusoe" type analysis. in mesoeconomics, a representative micro agent is chosen, and her behavior is exaggerated and generalized in such a way that similar corresponding macro behavior is akin to it. for example, in mesoeconomics, a representative firm is used to represent either an industry or the whole economy, depending on the question at hand. mailto:bijan@bidabad.com copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 2 the third category consists of those theories that come from intuitions and feelings of theoreticians based on their logical reasoning inspired by their findings from general economic, social, and psychological relations and facts among selected aggregate variables. at the fourth category, theoretician is going to innovate suitable logical tools to explain the relations of aggregates. that is, he tries to build a concrete logical structure from base to roof as similar to the observed phenomena. in contrast to the latter category, he does not try to justify the observations, but his endeavor is to build a specific behavioral model to interpret behavior. all the above first three categories suffer from certain deficiencies. the major problem with the first category is aggregation from micro to the macro level, which is always tricky. on the other hand, this micro foundation relies on what is generally regarded as the weakest part of micro theory as the tatonnement mechanism. generalization from micro to macro level as in the second category is again tricky. the majority of problems in these two categories are due to marginal principles. since this principle, holds at the micro level of analysis but does not hold at the macro level. at the former level, all agents are assumed to act as price takers, and there is no one who can change prices, but at the latter level, the aggregate variables can and should change price level. despite these, some authors have discussed that the fundamental distinction between macroeconomics and microeconomics is that macroeconomics is an attempt to understand situations of underemployment and excess capacity, while microeconomics is primarily concerned with situations of full utilization of resources (see, leijonhufvud (1968)). this distinction is well taken, certainly the inspiration for what we today call macroeconomics came from an attempt to understand the prolonged underutilization of resources. thus, it seems that the aggregated versus disaggregated nature of the study is the fundamental distinction between microeconomics and macroeconomics. in this regard, structuring microeconomic bases for macroeconomic analysis becomes a bit tricky. the methodology of the third category is highly widespread. although, it suffers from not having concrete micro or meso foundations, but is not pure of them. perhaps, it may be claimed that the major contributions to macroeconomics literature belong to this category. keynes's general theory of employment, interest, and money (1936) is the most famous milestone in this realm. the analysis based on the feeling and comprehension of the macroeconomic aggregate variables is the major characteristic of this category. theoreticians in this area try to understand the behavior of aggregates and think to find the interactions howness of them from the past facts. for example, one as keynes may observe a scatter plot of consumption versus disposable income during a long time horizon. at first glance, observer understands that all points follow each other around a linear straight positively sloped line through the origin at a high degree of closeness. description of this observation as "absolute income hypothesis" was the inference that keynes raised. interpretation of this phenomenon as a theory (consumption function) is free of basic prerequisite logical reasoning. though, this hypothesis has been shown to be most often true. the fourth category methodology consists of origins of original thinking in macroeconomic theorization. as an example, we may look at fisher's the purchasing power of money (1911). in this book, fisher uses very simple but concrete logical reasoning to explain the quantity theory of money. his reasoning uses some simple analytical tools as steelyard. empirical evidence has shown the validity of his theory based on so many evidence for such wide ranges of circumstances. and instances in which prices and quantity of money have moved together are recorded for many centuries of history, for countries in every part of the globe, and for a wide diversity of monetary arrangements. in subsequent discussions, we are going to touch some of the current macroeconomic discussions briefly, which suffer from not having concrete methodological tools. in this task, we do not survey the literature engaged; since there are valuable references to expose the chronological development of macroeconomic discussions. 3. macroeconomic aggregates generally, the aggregation problem is a scientific task to reduce or combine detailed information when data are too numerous or in too many details to be manageable. the microeconomic theory treats the behavior of optimizing individual agents. the desire to analyze the aggregates of macroeconomics leads to the theories that construct such aggregates from the behavior of individual agents. leontief's (1947a, 1947b) theorem states that commodity (or input) aggregate exists if and only if the marginal rate of substitution between any two kinds of commodities (or inputs) is independent of the quantity of other commodities (or inputs) excluded from our commodity (or input) aggregate. that is the marginal rate of substitution between each pair of elements included in and excluded from our aggregate are independents. according to this theorem, we are confronted with many copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 3 difficulties in macroeconomic aggregates (see, f.m. fisher (1988)). in the case of consumption, if a similar restrictive condition is satisfied for all the aggregates of consumer, then the household's utility function can be written in the aggregate term. if we wish to represent consumer behavior as maximizing the aggregated utility function subject to an aggregated budget constraint, we should have aggregate prices as well as aggregate consumption commodities. aggregate prices similarly should obey leontief theorem as well. to construct the aggregate demands of a collection of consumers by horizontal summation of their individual demands causes a set of questions. for example, only aggregate income and not its distribution can influence demand. on the other hand, at given prices, this makes the relative changes of demand to changes of income for all consumers’ demand for a given commodity the same constant. in the case of production, the satisfaction of leontief condition is again required for aggregation over inputs or outputs. accordingly, movement of inputs among different firms should leave total output unchanged. this necessarily requires that all firms’ production functions be linear in inputs with the same coefficients. assuming this assumption is highly strong. even this restrictive assumption will not suffice since there are high differentiations among inputs. that is not all labors are the same and all capital equipment too. on the other side, the linearity of production function implicitly implies a constant return to scale, and this causes to consider small firms equivalent to large ones. however, we may conclude that the analytical use of macroeconomic aggregates is without sound foundation (see, fisher (1988) and sonnenschen (1988)). that is, we cannot treat the consumption and production sides of the economy as a single household or firm. moreover, we cannot build aggregated variables with similar definitions that we have for microeconomic agents. this latter obstacle actually causes distortion of aggregate variables, which are used in macroeconomic analysis frequently. 4. macroeconomic relations in the macroeconomic analysis, we try to investigate the relation among macroeconomic aggregates. apart from the shortages of aggregates pointed out before, there are lots of paradoxes in macroeconomic relations. macroeconomists often tend to examine a large domain of economic phenomena by adapting theoretical concepts that had originally been devised for a much narrower range of special issues, especially at the micro level. the discoveries of paradoxical relations derive from the fact that their process of generalization often turns out to be ill-conceived and misleading, if not entirely unwarranted. one of the main sources of disputes among macroeconomists is because of this phenomenon and has made macroeconomics as the most controversial fields of economics. but, science looks for strong theories and behavioral laws to make the man able to forecast and control the states of variables. 5. monetary sector there is a huge amount of literature on monetary sector analysis, but among this literature, there are some major questions that have not been responding yet and are of crucial importance as economic methodology viewpoints. there are many intellectual and philosophical controversies among monetary economists to give a concrete and well-defined foundation for monetary discussions. the philosophical arguments that are milestones for developing theories are well treated but not sufficient in the realm of monetarism. many monetary variables have not been thoroughly defined yet. mainly, money itself does not have an exact definition to allow economists to refer to it properly in a theoretical-empirical consistent framework. however, across different structures of different economies, it is concluded that the definition of money should be consistent with what can be used as money in a specific economy and at a specific time. degree of moneyless and degree of public acceptability of different means as money are other problems that need to be recognized in each economy under consideration. in this regard, the particular content of money may be different from place to place and from time to time. it is discussed that there is no sharp distinction between money and other assets in the real world. moreover, it is the asset holder's decision that determines what asset types are close substitutes for another and which are not. it is also emphasized that one can define money as what is meant by a sufficiently close substitute for other assets and as far as the definition of money is concerned, the most important issue is the identification and measurement of stable aggregate demand for money function. thus, in the context of this more general approach, the correct definition of money becomes a matter of empirical analysis. here, an important question is arisen, as to what is the theoretical definition of money that is consistent with its real -world application. this is the point that turns the economist attention to the demand motives for money or kinds of assets that are included in the broader definitions of money. on the other hand, it is defined based on the functions that money performs. indeterminacies in the definition of money arise from misspecification of the functioning of money in the economy. on the other hand, money is defined commonly as anything that is generally accepted as a means of payment or in final settlement of a copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 4 debt. thus, this still remains the problem of classification, of enumerating those items that are generally accepted as a means of payment. acceptability is an attribute possessed by most assets but in varying degrees. however, for this "concrete" definition of money as means of exchange or store of value, we cannot draw the borderline to distinguish money from other assets that may be physical or non-physical, tangible or non-tangible assets, goods, services and so on. "abstract" definition of money that thinks of money as a unit of account or measure of value also cannot identify the border of money and other assets. however, in a technologically changing world and continuous improvements in financial systems, drawing such a borderline is not an easy task. the following example shows the reject ability of both concrete and abstract money definitions. the services that housewives offer their husbands to look after children and managing home affairs are noticeable if we could add them up in national income accounts. however, this is because of problems and shortcomings of national income accounting, but, for these services, no money is allotted, but the wives' services are compensated by other types of services as providing family expenditure and support that their husbands offer their wives. in this particular case, wives' services are exchanged by husbands' services in the absence of money. so, money as a means of exchange is not used, and nothing is stored by money as value. money is not also used to account the services exchanged or measuring the corresponding value. therefore, concrete and abstract definitions do not include the phenomenon presented by this example. there are many examples that may be observed which do not satisfy these definitions and the border of money, and other assets remain undefined. instead, economists have attempted to discuss the functioning of money based on various monetary aggregates. it is also tried that each monetary aggregate has certain characteristics to be consistent for specific issues. however, it is not a good remedy but is actually prevailed. now let us consider money as an economic commodity that has its own price and market consequences. if money is working as a commodity, it must have a price. its equilibrium price should be determined when its demand and supply meet each other in the market. again another question is arisen, as to what is the "price of money" definition!? there are many works of literature regarding the demand for and supply of money, but in existing theories, there is no coordination between the money demand and supply in the market to determine the price of money. the cornerstone of economic analysis is based on demand and supply analysis, and the main variable in demand and supply functions is price. we always talk about the demand for and supply of money without referring to the "price of money". that is we talk about the amount of quantity exchanged without reference to the price of exchange. some authors try to interpret inverse of general price level of goods and services as the price of money, but it is only an interpretation of a related variable and replacement of its inverse form instead of the lost "price of money" variable. however, even this interpretation of the "price of money" does not enter into demand and supply analysis of money theoretically. some other authors think of interest rate as money price. but it is not really true since when money is used for a transaction, no interest is mentioned and when money is used for speculation interest is matter. this means that interest rate as "price of money" is zero for transaction and positive for speculation purposes. thus, the interest rate is the productivity measure of money source not "price of money". it is by this misunderstanding that we observe the interest rate in the theoretical and empirical formulation of demand for and supply of money. ignorance of price in demand and supply functions is the same as neglecting the laws of demand and supply (see, bidabad (2014)) monetary transmission mechanism -that is the mechanism of transmission of the effects of the monetary sector onto the real sector is also distorted. the foundation of this mechanism is given by fisher's equation of exchange. this equation which relates money to the transaction is of the most important in this area, but this equation does not show the relation of the transaction to income and concluding money to income. after the introduction of this important theory, however, other schools of thoughts interpreted income as a scale variable of the transaction and tried to reinterpret velocity of circulation of money only as a variable, which equates nominal income to the stock of money as "income velocity of circulation of money" and so on. these interpretations actually distorted the main proposition of fisher, which is the most important contribution to monetary economics. 6. real sector let us start the discussion on the aggregate demand and supply as the final conclusions that macroeconomists try to sum up. generally, as pointed out before, we have not reached a complete methodology to find the economy utility (or welfare) and production functions. under the highly restrictive assumption, suppose we were able to define them. even in this case, optimization of global utility or profit of the economy is not possible, because the assumption of rationality does not hold anymore for the global economy. society is not as rational as an individual. abolishing of perfect competition is another problem. comparability of different statics does not establish. the optimization of utility or profit of the global economy is so far from those of individual economic agents, and there is no certainty that even have the same direction. social benefits can be in the opposite direction of individual benefits. this does not occur rarely, and it is actually a well-known discussion in copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 5 economic literature. by this, it is not possible to maximize the economy’s utility function to derive aggregate demand or to maximize the economy profit function to derive marginal cost as the aggregate supply curve. what is used as these functions of aggregate demand and supply are just conjectural curves similar to what we observe at microeconomics as market demand and supply. sectors of aggregate demand also suffer from not having certain theoretical bases. the main part of aggregate demand is the consumption function. this function should be a demand schedule. and every demand schedules must be functions of prices. this statement is an economic law, not a tautology. this is also true for investment demand function. these functions have deep roots in economic literature, but even no one of them states aggregate consumption or investment demands as functions of prices. in contrast to these sectors, demand for imports and supply of exports that conform to the foreign sector of aggregate demand have been introduced as functions of prices. other minor sectors of aggregate demand as changes in inventory and depreciation of capital also have the same problem of consumption and investment demands. another problem is mathematical aggregation (or summation) of the sectors functions. since income is equal to production at a macro level, and then the sum of all functions of sectors should add up to income. this condition is satisfied for national income accounts as the sum of sectors expenditures, but it does not hold for sectors of aggregate demand prevailing functions. that is if we sum up consumption function, investment function, government expenditures, export function, and negative of import function, we cannot reach the equation of "income equal to expenditures". on the other hand, the sum of these functions does not reduce to the original mathematical identity of national income. other aggregates at the income side of national income accounts as saving, transfer payments, and taxes have a similar problem. the saving function should be directly related to consumption, and thus, it should also be a function of prices. but the only variable that is not observed at saving function is price. the problem of mathematical summation cited before also remains unsolved at this side of national income accounts identity. that is, again, we cannot reach income by mathematical summation of the consumption function, saving function, tax function, and transfer payments function. definition of aggregates cannot recognize a definite border among them. we cannot actually distinguish saving from investment. we cannot explain the relation of saving at the monetary sector to saving at the real sector or at national income accounts. that is, we cannot link saving and time deposits at banking sector to saving and investment of real sector. although saving at banks, saving at national income accounts and investment as sub aggregate of expenditure are all "saving" and are all "investment". despite this, saving and investment both in monetary and real sectors, lead to the paradox of capital. capital itself is one of the main controversial variables in macroeconomic analysis. wealth, the nearest friend of capital, is another problem. these two latter variables have not exact definitions in macroeconomics, and there is no exact criterion to distinguish them. relating to capital, we cannot distinguish the substitution of old capital equipment by new ones from the depreciation of capital equipment. that is, we cannot draw a border to distinguish capital substitution from capital depreciation. relation of foreign exchange to domestic money is another puzzle. we do not know how the exchange rate is determined as a result of the monetary process. we observe a high correlation between domestic money and foreign exchange rates, but we cannot remove the problem of specification error in these relations. this means that we know the existence of such a relationship, but we do not know how it is. generally, the relation of variables is based on the empiricism rather that theorism. empirical relation of inflation and unemployment has been devoted to lots of literature. it is justified for short and long terms, and economists try to interpret why. dynamism over macroeconomic relations and introducing models as multi-period dynamic relations is just to make unsolved and unidentified problems more complex. in this area, the phenomenon of business cycles and economic fluctuation is of the most important problems. the monetary transmission mechanism is another unsolved problem in this area. we do not have an exact response to the question as to how the monetary sector can affect the real sector, because this mechanism is highly dependent on the interest rate and interest rate is a time-based variable. thus, all monetary and fiscal policies are determined in a realm of doubts about their effects on the economy. 7. conclusion disregarding the how macroeconomic aggregates are constructed and their structural definitional problems, what we know about the behavior of macroeconomic variables is just our understanding from empiricism, and we have rarely found the laws of the inter-relationship among macroeconomic variables. perhaps it can be said that fisher's original quantity theory of money is just our main progress at macroeconomics. he tries to express equilibrium rather than going through supply and demand. other successive theories have an intuitional foundation, as discussed before. disregarding the definition of aggregate and sub-aggregate variables, national income accounting, and identities among total income and total expenditures and total production is an copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 6 elegant theoretical base for macroeconomic analysis. it seems that to improve macroeconomic theories and policies, we need to redirect researches to basic philosophical thinking about the macroeconomic theoretical foundation and try to rebuild a new concrete base for macroeconomics. references bidabad, bijan. [2014], bijan bidabad, general monetary equilibrium. lap lambert academic publishing, omni scriptum gmbh & co. kg, isbn: 978-3-659-54045-5, spring 2014. bidabad, bijan. [2014], money-transaction-income process (quantification of quantity theory of money). proceeding of the 3rd international conference on economics, political, law and fiscal sciences (epls '14), world scientific and engineering academy and society (wseas). transilvania university of brasov, brasov, romania, pp. 213-220, june 2628, 2014 . http://www.bidabad.com/doc/mtv4.pdf http://www.bidabad.com/doc/mtv4.ppt bidabad, bijan. [1991], dependence of research methodology on laboratory tools in economics. methodus, bulletin of international network for economic method, vol. 3, no.1, june, 129-30. bidabad, bijan. [1990], micro-macro analysis of trade and migration, economic and management journal, no. 7, winter, islamic azad university, tehran, iran. http://www.bidabad.com/doc/mohajerat-tejarat.pdf chrystal, k.a. [1990], (ed.) monetarism, vol. i, ii; edward elgar. dean, e. [1965], (ed.); the controversy over quantity theory of money, d.c. health & company, a division of raytheon education company, lexington, massachusetts. fisher, i. [1911], the purchasing power of money, its determination and relation to credit, interest, and crises; assisted by h.g. brown, reprinted by augustus m. kelly bookseller, 1963, new york. fisher, d. [1980]. monetary theory and demand for money, martin robertson pub., oxford. fisher, f.m. [1988] aggregation problem, the new palgrave, a dictionary of economics, j. eatwell, m. milgate, p. newman; eds., macmillan. hume, d. [1752]. of money, in writings on economics, edited by eugene rotwein (university of wisconsin press, 1970). reprinted of selected essays from political discourses, 1752. johnson, h.g. [1979]. (ed.), selected essays in monetary economics, 2nd impression, george allen & unwin, london. keynes, j.m. [1936], general theory of employment, interest, and money, macmillan, london. laidler, d.e.w. [1977]. the demand for money: theories and evidence, 2nd ed., harper & row inc., new york. laidler, d.e.w. [1969]. the definition of money: theoretical and empirical problems, journal of money, credit and banking, aug. leijonhufvud, a. [1968], on keynesian economics and the economics of keynes, new york, oxford university press. leontief, w.w. [1947a]. a note on the interrelation of subsets of independent variables of a continuous function with continuous first derivatives. bulletin of american mathematical society 53, 343-56. leontief, w.w. [1947b], introduction to a theory of internal structure of functional relationships. econometrica 15(4), october, 361-73. mayer, t. [1990], (ed.), monetary theory, edward elgar, london. muellbauer, j., r. portes [1978] macroeconomics models with quantity rationing, the economic journal, december. newlyn, w.t. [1974], theory of money, oxford university press. ng, yew-kwang [1986]. mesoeconomics: a micro-macro analysis, brighton, u.k., wheatsheaf. pesek, b.p. [1979], modern bank deposits, and the theory of optimum money, in economic perspectives, an annual survey of economics. m.s. ballabon (ed.), baruch college of the city university of new york, vol. i, harwood academic publishers, chur, new york. patinkin, d. [1965]. money, interest and prices, an integration of monetary and value theory, 2nd ed., harper & row, new york. pierce, d.g., d.m. shaw [1974]. monetary economics, theories, evidence, policy; london, butterworth. sonnenschein [1988], aggregate demand theory, the new palgrave, a dictionary of economics, j. eatwell, m. milgate, p. newman; eds., macmillan. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). http://www.bidabad.com/doc/mtv4.pdf http://www.bidabad.com/doc/mtv4.ppt http://www.bidabad.com/doc/mohajerat-tejarat.pdf asian finance & banking review; vol. 2, no. 1; 2018 issn 2576-1161 e-issn 2576-1188 published by centre for research on islamic banking & finance and business 7 analytical review of corporate social responsibility and corporate financial performance of some firms from within and outside nigeria abdulrahman, s 1 1 department of accounting, faculty of social and management sciences, bauchi state university, nigeria. correspondence: department of accounting, faculty of social and management sciences, bauchi state university, gadau, bauchi state, nigeria., e-mail: abdulningi17@gmail.com. tel: +2347035597220. received: january 17, 2018 accepted: january 20, 2018 online published: january 25, 2018 abstract this study analyzed the corporate social responsibility (csr) of firms with their corporate financial performance (cfp) based on contextual content analysis. the study forge ahead to compare the outcomes of various conceptual and empirical studies that deals with csr and cfp from within and outside the domicile of nigeria. the findings from the previous studies showed conflicting results or outputs (i.e. many positive outcomes, some negative results while very few showed neutral relationship between csr and cfp of firms). therefore, this study is of the opinion that there is a positive cordiality between csr and cfp because more than 50% of the authorities/scholars in the field proved it conceptually and empirically that there is positive relationship among the two concepts (i.e. csr and cfp). as such, the issue of csr should be given a more consideration by all the parties to it (i.e. employees, employers, government, researchers, management and the public at large). since, it yields positive impact to the cfp of firms as such a dedicated agency or commission should be established to be monitoring the firms toward real implementation of csr. keywords: corporate social responsibility (csr), corporate financial performance (cfp), content analysis, stakeholders theory, shareholders theory, judgmental sampling. 1. introduction the field of tension between corporate social responsibility (csr) and corporate financial performance (cfp) is addressed in studying the relationship between the two concepts because firms are mostly grapping on strategic, tactical and operational levels to identify ways to meet society’s demands. this is in combination of achieving company performance targets in an economic climate under pressure. the question whether businessmen have social responsibilities to fulfil is an ethical question and the answer to an ethical question, is a matter of opinion and individual perception. according to friedman (1970) “there is one and only one responsibility of business to use its resources and engage in activities designed to increase its profit so long as it stays within the rule of the game; which to say engage in open and free competition without deception or fraud”. csr is one of the most controversial areas of debate that continues to be of great concern to corporations, researchers, analysts, communities, investors and even the entire public. this is due to its complexity vis-à-vis worldwide acceptable connotation of the term, yardstick of measuring it and even the yardstick of measuring the financial performance of the corporations is contradicting (abdulrahman, 2014). the questions are: is there any positive relationship between csr and cfp among the firms?, is there any negative relationship between csr and cfp among the firms?, is there any neutral relationship between csr and cfp among the firms? the study intends to restrict itself within the analytical review of the previous studies within the field of csr and cfp to achieve the specific and general objectives of the study. it is expected that the benefits that will be derived from this study cannot be overemphasis. many beneficiaries are expected to benefit from this research, to mention among the few are the researchers, the consultants, the regulatory authorities, the management and the entire public at large. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 8 2. review of related literatures in retrospect, the development of the definition of the csr concept, and related concepts, has centred on three themes: corporate relations in the economic, societal and environmental dimension, and sustainability (wissink, 2012).that is why, in practice or even in theory and literature there is no any contextual and a worldwide acceptable definition of the key term csr, it depends upon with the way and manner you view it, because even among the classical, neoclassical and modern scholars, they did not reach any consensus or unanimous concord as regards to the conceptual connotation or denotation of the term. but this will never demoralize the effort of researcher in looking at the contradicting views of the scholars, as it will be mentioned in the next paragraphs. the term csr is often used interchangeably with other terms, as such it should not be a surprising when various authors consider other term instead of csr such as corporate conscience, good corporate citizenship, corporate citizenship, business responsibility, business citizenship, social performance, sustainable responsible business, community relations, responsible business and is also linked to the concept of triple p (i.e. people, planet, profit or "the three pillars”) (tilt, 2009) or triple bottom line reporting (tbl or 3bl), which is use as a framework for measuring an organisation’s performance against economic, social and environmental parameters (shah, 2007). from the point viewed of frooman (1997) csr is just an action by a firm, that it chooses to take, that substantially affects an identifiable social stakeholder’s welfare. according to kurtz (2006), csr involves marketing philosophies, policies, procedures and actions whose primary objective is the enhancement of the society. jones and george (2003) term the concept of csr as managers’ duty or obligation to make decisions that nurture, protect, enhance and promote the welfare as well as the well-being of stakeholders and society as a whole. ruggie (2002) looked at csr as a strategy for demonstrating good faith, social legitimacy, and a commitment that goes beyond the financial bottom line. but holme and watts (2002) opined csr as capacity building for sustainable livelihoods. in respect of cultural differences and look for business opportunities in building the skills of their employees, government and the community at large. while carroll and bocholt, (2003) viewed csr as economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time. baker (2012) holds that csr is all about how companies manage the business processes to produce an overall positive impact on society. while carroll, (1979) looked at csr as the economic, legal, ethical and discretionary demands that society places on business. in another viewed, csr is defined as a concept that requires business to contribute to the immediate community where they operate, in a view to ensuring the growth and development of that community in particular, and the economy as a whole (dandago & muhammad, 2011). the issue of csr is of paramount importance that needs serious consideration both from within and from outside. the empirical study results on the csr and cfp have never been in agreement, because so many researchers found different results. some studies determined negative relationship, positive relationship, while others determined no relation at all between the two terms. there are so many empirical studies of csr and financial performance like in the case of griffin and mahon (1997) summarized their findings of numerous articles they reviewed and came to the conclusion that no definitive consensus exists on the empirical csp and cfp. other empirical evidence suggests conflicting results about the direction of csp and cfp linkage (i.e. alexander and buchholz, 1978; aupperle, carroll and hatfield, 1985; ullman, 1985). however, additional studies have found a positive relationship (i.e.; tsoutsoura, 2004, uwalomwa & egbide 2012, gunu 2008; uadiale & fagbemi 2011; david 2012; bowman, 1975;, preston, 1997; anderson and frankle, 1980). waddock and graves (1997) found a positive association between csp and return on asset, return on equity, and return on sales of firms, and tested such association to be bidirectional. this is inconsistent to findings from other prior studies which have identified a negative relationship (i.e., aupperle, carroll & hatfield 1985; friedman 1970; adeboye & olawale 2012; igbal ahmad & nadeem 2012; marcia, otgontsetseg & hassan 2013; freedman and jaggi, 1986). then finally, those that found neutral relationship (macwilliams & siegel 2000; adeboye, and oluwatoyosi & elizabeth 2012;), are of the view that csr have neutral relationship with financial performance of corporations. in view of these conflicting results in trying to find the existence of relationship between the csr and financial performance we can rightly say that it is not an easy task to discover the linkage between the two key terms (ullmann 1985). hence the relationship is unclear. other studies on csr and cfp are tabulated below for a better expatiation: www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 9 table 1: empirical studies from within and outside nigeria s/no author name (s) and year scope of study independent variable(s) dependent variable outcomes or results country nature of data 1 uadiale & fagbemi(2011) 2007 community performance, environmental management system return on assets (roa) & return on equity (roe) positive and significant relationship nigeria cross sectional data 2 gunu (2008) 2002-2006 csr disclosed in shareholders report profit after tax (pat), divident, total assets (ta), and gross earnings positive and significant relationship nigeria time series data 3 bolanle, olanrewaju & muyideen (2012) 2001 2010 csr disclosed in shareholders report profit after tax (pat) positive relationship nigeria time series 4 bello (2012) 2002 2006 donations (dn), environmental pollution & prevention (epp), health & safety of employee and employment of disable person (hs) roa negative and no significant relationship nigeria time series of individual observations of companies 5 oba (2009) 2001 2006 community social responsibility, human resource management, charitable contribution and firm size market value measured by tobin’s equity q significant aggregate impact nigeria penal data 6 uwuigbe & egbide (2012) 2008 return on total assets (rota), debt to equity (nature of the industry) & size of audit firm csr disclosure index positive relationship nigeria cross sectional data 7 iqbal, ahmad, basheer & nadeem (2012) 2010-2011 corporate social performance (csp) index roa, roe, d/e, & market value of share negative relationship pakistan panel data 8 david (2012) 2011 csr disclosure index societal progress significant relationship nigeria cross sectional data 9 ojo (2007) 2002-2006 csr disclosed in shareholders report turnover of gross earnings positive relationship nigeria panel data 10 olayinka and fagbemi (2012) 2012 csr disclosed in shareholders report roe & roa positive and significant relationship nigeria cross sectional data 11 tsoutsoura (2004) 1996-2000 kld scores and domini 400 social index roa, roe & ros positively and statistically significant california panel data 12 meijer & schuyt (2005) 2005 csr consumer motivation negative relationship dutch cross sectional data 13 brine, brown & hackett (2006) 2005 dummy variable roa, ros & roe no significant relationship australia cross sectional 14 saleh et al, (2007) positive relationship 15 fiori et al. (2007) 2002-2007 csr disclosed in shareholders report stock price positive relationship italian panel data www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 10 16 asongu (2007) questionnaire questionnaire positive relationship africa questionnaire 17 ali et al, (2010) 2010 questionnaire questionnaire no significant relationship pakistan questionnaire 18 servaes and tamayo (2012) 2010 csr disclosed in shareholders report advertising expenditures positive relationship nigeria cross sectional data 19 wissink (2012) dow jones sustainability index (djsi) return on equity (roe), return on assets (roa) and return on sales (ros) positive relationship the world’s 2500 largest companies questionnaire 20 vitezić (2011) 1993 -2010 social responsibility development corporate efficiency positive relationship croatian enterprises panel data 21 anescu (2009) 19912007 kld stock return positive relationship us panel data 22 purnomo and widianingsih (2012) 2006-2010 proper rating with csr disclosure as a moderating variable net profit margin positive relationship indonesia panel data 23 yang, lin and chang (2010) 1.csp (size & r&d as controlled variable 2.cfp (size & r&d as controlled variable 1.cfp 2.csp mixed relationship taiwan panel data 24 el ghoul, guedhami, kwok and mishra (2012) employee relations, environmental policies, and product strategies cost of equity positive relationship u.s 25 afonso et al (2012) 2005 2009 csr index return on equity (roe), return on assets (roa) and return on sales (ros) mixed relationship portuguese panel data 26 setiawan and janet (2012) 2007-2010 corporate social responsibility financial performance positive relationship indonesia interviewing 27 lungu, chiraţa and dascălu (2011) content analysis corporate social responsibility size characteristics measured by assets and revenues negative relationship 28 keffas, and olulu-briggs (2011) thirty-eight (38) financial and economic ratios based on variables such as asset quality, capital, operations and liquidity positive relationship japan, us and uk 29 mcwilliams and siegel (2001) 1991-1996 industry, and expenditure for research and development dummy variable; domini 400 social index (dsi 400) insignificant u.s panel 30 simpson and kohers (2002) community reinvestment act (cra) ratings financial performance 31 mahoney and roberts (2007) four years corporate social responsibility financial performance mixed relationship canada panel data 32 subroto (2002) csr financial performance positive relationship indonesia cross-sectional data 33 abdulrahman (2014a) 2006-2011 er, cp, ems roe positive relationship nigeria panel data 34 abdulrahman (2013) 2006-2010 csr profit after tax (pat) weak positive relationship nigeria panel data www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 11 table 2: other empirical studies sources: researcher literature reviewed different theoretical frameworks have been brought to bear on the concept of csr, depending on one’s perspective; two major prominent schools of thought among them are restrictive and expansionists schools of thought. agency theory: this theory is talking about firm as a link between the agents and their principals because of the contractual relationship, the agents (i.e. managers) can act on behalf of the principals (i.e. owners). the whole essence of agency theory is attempting to deal with two specific problems; if the goals of the principal and agent are in conflict, and to reconcile the principal and agent different tolerances for risk. legitimacy theory: this theory posits that business organizations must consider the rights of the community at large, not merely those of investors. if the corporations do not appear to operate within the bounds of the behavior considered appropriate by the community, then the community will act to remove the organization's right to continue its operations. when an actual and potential disparity exist between the business and social value systems, this will lead to threats to organizational legitimacy in form of legal, economic, and other sanctions. the theory also assumes that a company not acting legitimately would be denied continued existence by the society and the society has the power over institutions to force them to dissolve (tijjani, 2011). stockholders theory stockholders or shareholders theory addresses only the interest of four parties that constitute investors, employees, suppliers and customers. stockholder management will not be able to sustain itself in a relatively free society because, if agents feel that an activity does not serve their interests they will either abandon that activity or change the law in order to constrain that activity and such an activity will not be able to sustain itself unless the interests of all participants are served by the activity. political economy theory according to gray et al (1996, p. 47) look at this theory as the social, political and economic framework within which human life takes place, etc political economy, which is economic analysis from political and historical perspectives. the theory embraced that society, politics and economies are inseparable, and economic issues cannot meaningfully be investigated in the absence of considerations about the political, social and institutional framework in which the economic activity takes place. political economy deals with the distributive consequences of economic actions. it asks who gains and who loses from economic activity and is the resultant distribution fair or just, which are central ethical issues (robotham 2005). stakeholders’ theory the stakeholder concept was first used in 1963 internal memorandum at the stanford research institute. they defined stakeholders as "those groups without whose support the organization would cease to exist." the theory was later developed and championed by r. edward freeman (1980s). since then it has gained wide acceptance in business practice and in theorizing related to strategic management, corporate governance, business purpose and corporate social responsibility (csr). hawke (2009), posit that stakeholder theory is true if and only if stockholder theory is true and the only way that a business manager can maximally serve the interests of shareholders is by serving the interests of all stakeholders. theoretical framework the theoretical framework underpinning this study is stakeholder’s theory because is a theory of organizational management and business ethics that addresses morals and values in managing an organization. stakeholder’s theory 35 abdulrahman (2014b) 2006-2011 csr total assets (ta) strong positive relationship nigeria panel data 36 abdulrahman (2014c) 2006-2011 er, ems total assets (ta) strong positive relationship nigeria panel data s/no author name (s) year measure of csr measure of firm performance outcomes or results 1 cochran & wood 1984 moskowitz reputational index abnormal return positive relationship 2 aupperle, carrol, & hatfield 1985 carroll’s (1979) csr construct roa no relationship 3 fombrun & shanley 1990 charitable contributions, fortune index roic, market-to-book ratio mixed relationship 4 mcwilliams & siegel 2000 kld index roa mixed relationship 5 orlitzky, schmidt, & rynes 2003 kld index p/e ratio, roe, roa mixed relationship www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 12 attempts to address the principle of whom or what really counts. it is also an instrumental theory of the corporation that integrates both the resource based view as well as the market based view and adding socio-political level. the following diagrams show how the stakeholders’ theory correlates various corporate bodies into a single or unit corporate body; because stakeholder is that which can affect or be affected by the actions of the business as a whole. the stakeholders’ theory has been found to have an allure or influence in the real academic literature. the structure of stakeholders theory umbrella source: researcher observation circular flow of corporate social responsibility (csr) source: researcher observation from the above aforementioned two diagrams we can see the link between the communities and the corporate bodies, which implies a causal relationship in form of interwoven relationship even though the communities can survive without the companies but the companies cannot survive without the communities. bolanle et al (2012) from their own perception they viewed csr as a comprehensive set of policies, practices, and programs that are integrated into business operations, supply chains and decision making processes throughout the company and usually include issues related to business ethics, community investment, environmental concerns, governance, human rights, the marketplace as well as the workplace. by looking at the previous circular flow of csr and the • local communities• government/ngo • unions/employees• consumers/s hareholders marketplace workplace communityenvironment unions/emplyees local communities impact on society government/ngo consumers/s hareholders www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 13 umbrella of stakeholders’ theory respectively, we can easily deduced from the definition of the pioneers that their point of viewed explained the diagrams. 3. methodology for the purpose of this study, judgemental sampling method was been adopted by using simple percentage and application of excel to analyse the data. the formula of simple percentage is as follows: 𝐹 𝑁 𝑋 100% 1 where table 3: key terms description meaning % percentage f frequency n total number 100 constant source: researcher reviewed 4.findings and discussions the study reviewed so many empirical researches and it is based on the study the researcher discovered the following findings: table 4: synopses of the study s/n description total observed outcome percentage 1 positive relationship 38 56.72% 2 negative relationship 11 16.42% 3 neutral relationship 6 8.96% 4 no relationship 3 4.48% 5 mixed relationship 9 13.42%` 6 total 67 100% source: reviewed literature from the above table 4, it can be deduced that different researchers came up with different findings. for instance out of the 67 empirical researches reviewed under csr and cfp, 38 researchers found positive relationship between csr and cfp which constituted 56%. another 11 researchers which is 16.42% discovered a negative relationship between csr and cfp while 6 out of 67 researchers found a neutral relationship between csr and cfp which constituted 8.96%. moreover, 3 researchers found no relation between csr and cfp which has 4.48%. some researchers discovered mixed results which partake 13.42% (i.e. 9 empirical researches). 1. positive relationship : 38 67 𝑋 100% 1 = 56.72% 2. negative relationship : 11 67 𝑋 100% 1 = 16.42% 3. neutral relationship : 6 67 𝑋 100% 1 = 8.96% 4. no relationship : 3 67 𝑋 100% 1 = 4.48% 5. mixed relationship : 9 67 𝑋 100% 1 = 13.42% www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 14 source: analysed output from excel, 2017. as demonstrated from the bar-chart above. it can be noticed from the right hand side to the left hand side that 67 constitute of the entire total which is indicated within the range of 0% to 70% and 9 researchers’ findings fall within 0% to 10% while 3 researchers’ findings fall within 0% to 5%. moreover, 6 researchers findings fall within 0% to 9% and 11 researchers findings is within the range of 0% to 20% and then finally 38 researchers findings is within the range of 0% to 40%. source: analysed output from excel, 2017. from the above pie chart it can be observed that different researchers came up with different findings. for instance out of the 67 empirical researches reviewed under csr and cfp, 38 researchers found positive relationship between csr and cfp which constituted 57% approximately to zero decimal place. another 11 researchers which is 16% approximately to zero decimal place discovered a negative relationship between csr and cfp while 6 out of 67 researchers found a neutral relationship between csr and cfp which constituted 9% approximately to zero decimal place. moreover, 3 researchers found no relation between csr and cfp which has 5% approximately to zero decimal place. some researchers discovered mixed results which partake 13% approximately to zero decimal place (i.e. 9 empirical researches). 4.conclusion and recommendations this study was conducted to analyse the cordiality between csr and cfp among the empirical studies carried out from within and outside nigeria. the result of the study shows that majority of the studies carried out found positive relationship among the two concepts. some studies conducted such as pava and krausz (1996) identified and reviewed 21 empirical studies in his study, while margolis and walsh (2003) reported that 122 published studies empirically examined the relationship between csr and cfp during the period 1971 – 2001. furthermore, orlitzky, schmidt, and rynes (2003) conducted a meta-analysis of 52 studies, which revealed that most results of prior studies found that csr had a positive impact on financial performance which is in line with the finding of this study. therefore, it can be logically jump to conclusion that there is strong positive relationship between csr and cfp. as such regulatory authorities should come to play a vital role towards ensuring firms compliance with csr. references abdulrahman, s. 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(2010), the linkage between corporate social performance and corporate financial performance african journal of business management vol. 4(4), pp 406-413, april 2010 available online at http://www.academicjournals.org/ajbm issn 1993-8233 © 2010 academic journals copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) http://www.ccsenet.org/jms http://www.academicjournals.org/ajbm asian finance & banking review; vol. 2, no. 1; 2018 issn 2576-1161 e-issn 2576-1188 published by centre for research on islamic banking & finance and business 18 corporate characteristics and influence on share based payment of financial service firms in nigeria davies, stanley diepiriye 1 & lucky, anyike lucky 1 1 department of accountancy, ken saro-wiwa polytechnic, bori, rivers state, nigeria 2 department of banking and finance, rivers state university, nkpolu orowurokwo, port harcourt,rivers state, nigeria. correspondence: davies, stanley diepiriye, department of accountancy, ken saro-wiwa polytechnic, bori, rivers state, nigeria. received: january 19, 2018 accepted: january 22, 2018 online published: january 27, 2018 abstract this investigates the effect of corporate characteristics on share base payment of financial service industry in nigeria. objective of the study is to if internal factors affects share base payments of corporate organizations in nigeria. we analyzed five commercial banks and five insurance firms that are quoted on the floor of nigerian stock exchange. technique adopted for sampling adopted is convenience sampling. as the nature of data is panel therefore, pooled regression, fixed and random effect tests are run. random effect results are focused after applying hausman’s test. from the fixed effect model, tangibility, risk, management efficiency, debt equity ratio, corporate governance and cost of capital have negative but insignificant effects while return on investment, liquidity and firm size have positive and insignificant effect on share base payment. we conclude that corporate characteristics does not significantly influence share base payment of the selected financial service firms. we therefore recommend that the use of share base payment should be integrated with the corporate structure such as ownership structure, capital structure and others. keywords: share base payment, corporate characteristics, financial service firms, agency theory, corporate payout policy. 1. introduction the traditional finance paradigm, theory and teaching put the shareholders wealth maximization as the primary goal of corporate management. the shareholders wealth maximization as function of management is a critical function that requires tactical and strategic measures to achieve. apart from maximizing shareholders wealth as finance theory formulated, the corporate organization has obligations such as payment to employees and creditors. these can be raid in cash or share base payment. the emergence of share base payment dates back to the 1920s when it highlighted a change in ownership of the company. due to an increasing number of private investors that became interested in the stock exchange and in yield investments, the separation of ownership and control of the companies started (zhou, 2010). share based payment issued by international accounting standard board is regulated by international financial reporting standard. this standard addresses payments and compensation plans which have been more and more accepted and adopted. alexander et al. (2007) noted that bonus and profit sharing plans have for a long time been the only widely used instrument to increase compensation for executives and employees‖. however, from the beginning of 1990s stock based compensation, or more broadly share-based payments, became very popular (hall and liebman, 1998). share based payment awards are an integral component of a total compensation package. as such, they concluded that an entity should recognize an expense for share-based payments, just as it does for cash compensation (ross, 2004). international financial reporting standard 2 distinguishes between the accounting treatments for share-based payment transactions of equity-settled versus cash-settled. a transaction is treated as equity-settled when an entity receives goods or services as consideration for its own equity instruments (including shares or share options), or it receives goods or services but has no obligation to settle the transaction with the supplier. additionally, increased www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 19 competition adds special concern and is considered a problematic issue. it is a must for firms to find alternative solutions in order to increase performance and be efficient. share based payment seems to present a paradox in terms of giving contribution to firms. its use may relate to some firm´s characteristics and it may represent important and relevant information to owners and management. the negative side‖ regarding the use of share based payment related to an opportunistic behavior which may be replaced once potential users of this incentive remuneration plan are aware of the benefits of its use when appropriated. that is the reason why studying the determinants of share based payment use plays a significant role (johnston, 2006). (duncan, 2001) noted that a major proposition of the agency theory is that the conflict of interests between an agent and a principal is reduced when the agent’s wealth and compensation are tied to the performance of the firm. apart from the direct predicted relation to corporate performance, compensating managers with equity instruments has implications for corporate risk-taking and payout policy choices. additionally, equity-based compensation practices are to a large extent shaped by institutional factors, such as accounting regulations and corporate characteristics ( baker, collins and reitenga, 2009). empirical studies concerning share based payment is made by the discussion regarding the role and motivation for the use and effects of share based payment. however, there are limited studies of citable significance that have death with corporate factors that determine share based payment not much focus has been made on the determinants of share based payment, especially when it comes to knowing about companies’ characteristics influence on implementation of such plan. existing studies have failed to conclude on factors that determine share based payment and the direction of causality. the importance of looking at the determinants is that it shows the users including owners and managers a way in which share based payment is used as an efficient tool for motivation and monitoring, it is interesting to investigate how corporate characteristics are associated to share based payment. connecting the share based payment use with corporate characteristics and finding certain patterns of determinants for its application, provides relevant information regarding what kind of corporate characteristics is a predictor for the use of share based payment as an efficient tool. thus, understanding the determinants bring advantages for the users as it helps them to know in which way the use of share based payment can be a good alternative for other remuneration plans(frydman and saks, 2010). therefore this study intends to examine corporate characteristics and share based payment of financial service firms in nigeria. section two focuses on both theoretical and empirical review of related literature, section three deals with the research methodology. section four deals with the data analysis and presentation and the fifth section contain the conclusion and recommendations from the findings. 2. literature review share based payment share-based payment is defined as transactions in which an entity receives goods or services in exchange for equity instruments. ifrs 2 makes the following categorizes of share based payment: equity settled share based payment in this category of share-based payment plan share, share options and other equity instruments are transferred to directors, senior executives and other employees. there are different types of share options including, call options, subscription options, synthetic options, and convertibles. an example brought by alexander et al. (2008) is used to illustrate this kind of transaction and this is when top executives or/and employees receive as part of remuneration, shares, options or other equity instruments. this can be received through different kind of compensation plans including, employee stock option plans (esps), and employee stock purchase plans (espps), restricted stock plans, and employee stock ownership plans (esops). cash settle shared based payment transaction in this transaction the entity shall measure the services acquired and the liability incurred at the fair value (fv) of the liability. the amount will depend on the future market price of the equity instruments as part of a remuneration plan. until liability is settled the entity shall measure the fv of the liability at each reporting date with any changes in the fv of the liability is recognized in profit or loss account. the amount of cash to be received will be determined by the value of the option at the exercise date. alternatives cash or share options in this transaction it is up to the counterparty or the entity to choose the settlement of the share-based payment. in this case the entity grants the counterparty the right to choose whether share-based transaction is done by cash or by issuing equity instruments. disclosure of share based payment the main disclosure requirements for stock option plans are mentioned in the standards (ifrs 2 and fas 123). besides that further requirements may be needed in different countries based on their own codes of corporate governance. the requirements that are provided by ifrs 2 for disclosure include the nature and the extent of sharebased payment arrangements during the period, information about the fair value of the equity instruments and how it is achieved, and the effect of the share-based payment transactions on the financial position and profit/loss of the www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 20 entity. the standard requires that a detailed description of all share-based payments should be disclosed. this includes all different types of share-based arrangements and their conditions, all the information about the granted options including, number of options at the beginning of the year and outstanding options at the end of the year, number of granted options, exercised options and expired options, weighted average exercise price of options and all the detailed information for this transaction which can have an impact on the decision of the users of financial statements. the information should be disclosed in the financial notes in the annual reports. theoretical framework efficiency perspective efficiency perspective explains that different accounting methods and policies are used to reflect the underlying performance of the firm in the efficient way. deegan and unerman, (2006) state this theory can also explain why a particular method is implemented inside companies with different organizational characteristics. this perspective is very close to this research as we observe different characteristics of the companies and see the relation that they have with the implementation of share-based payment plan. this perspective can be closely related to the agency theory explained by jensen and meckling (1976). they argue that this practice can lead to cost saving. based on this perspective the adoption of this plan is based on the management consideration for solving the agent problem and enhancing the performance of the company. deegan and unerman, (2006) refer this view usually to ex ante perspective which means the mechanism is put in the place to minimize the future cost of an/the agent. advocates of this perspective express their arguments through different theories. the pioneers in this area are jensen and meckling (1976), and jensen and murphy (1990). some argue that use of share-based payment can motivate management to choose a method that helps to reduce the agency cost. the reason is that, firms will be allowed to choose those accounting methods that best reflect the performance of the firm. it would be argued that management is best able to select which accounting methods are appropriate for the special situation. therefore, use of sbc is considered as the most effective tool in pay-performance relation. another related argument for supporting this perspective is that this method can also solve the information asymmetry by giving the principle an opportunity to monitor the agent. in this context, share-based payment is a bridge which can bring efficiency for both sides of this bridge, principal and agent. opportunistic perspective an alternative perspective is based on this idea that in choosing particular accounting methods there are other objectives which is driven by self-interest. deegan & unerman (2006), consider this perspective as a practice of creative accounting. this means that a specific method is applied in the situation where accounting methods are selected based on the intention of the people who are responsible for the preparation of accounts. this perspective is referred as ex post perspective which means after the fact, because it considers opportunistic behavior, after all are arranged in a contractual arrangement. hence, some of the bonus plans including profit based compensation and share-based payment have been blamed for this opportunistic perspective. advocates of this perspective believe that use of this method can attract managers to elect to adopt particular accounting methods whenever they believe that this will lead to an increase in their personal wealth. furthermore, according to faulkender et al. (2010), an effective pay package is not necessarily the one most laden with equity incentives, since too much equity exposure can cause excessive risk-taking, manipulation, and shift executive attention away from true value creation. this is why they state that based on this theory for choosing particular accounting methods management is opportunistic. the techniques that are known in accounting as opportunistic behavior are earning management and off balance sheet funding. this perspective is studied by many authors in our survey and is based on the idea that the separation between ownership and management might give managers substantial power. this gain of power may result in side effects of such compensation plans. this issue is addressed for example by alexander et al. (2007), peng and röell (2008), blasi et al. (1996), cheng and warfield (2004), core and guay (2001), and yermarck (1997). they all have the common argument that using share-based payment and thus addressing the agency problem by granting executives may induce managers to act in an inappropriate manner. blasi et al. (1996) are against the empowerment of the executives, instead they prefer and defend that the workforce should be the ones included in such programs, acting like owners increase profitability performance and productivity. agency theory an agency relationship is established when a principal delegates a decision making responsibility in a firm to an agent. although a natural and inevitable stage in the evolution of the corporation, the resulting separation of ownership from control leads to an agency conflict, because the controlling mangers, whose actions are unobservable, may be tempted to pursue their personal goals when running a company. such a moral hazard www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 21 behavior may take a variety of forms, including overconsumption of perquisites, diversion of corporate resources and exertion of insufficient effort. this problem, recognized already by smith (1776) and described in greater detail in berle & means (1932), is at the core of the two central theoretical frameworks for studying executive ownership and compensation. the first line of research approaches the agency problem by contemplating managerial equity claims in the context of the ownership structure of the firm. jensen & meckling (1976) compare the behavior of a manager when she owns 100% of equity claims of the firm to the situation when she sells off a portion of these claims to outside shareholders. using an example with non-pecuniary benefits they demonstrate, that while a partial manager-owner enjoys the full benefits of perquisite consumption, she bears only a portion of the associated costs equal to her partial ownership. the investors anticipate the overconsumption of perquisites by a manager and factor the associated agency costs into the price they are willing to pay for the stock. within this framework the manager’s fractional ownership represents a measure of severity of the agency conflict. the intuitive prediction of this theory is that with an increase in managerial ownership the interests of an agent and a principal become aligned, thereby inducing the agent to act in the best interests of a principal. although not ignoring the existence of the agency problem arising from managerial self-serving behavior, several studies criticize the theoretical grounds of the “incentive alignment” hypothesis by relying on market efficiency reasoning. demsetz & lehn (1985) develop the so-called optimal contracting theory by arguing that the observed firm ownership structure is an endogenous outcome of a competitive selection in which costs and benefits are balanced to arrive at the equilibrium organization of the firm. in other words, the survival of the dispersed ownership implies that the benefits of this organizational form outweigh the costs to the shareholders and that the observed firm ownership structure is value-maximizing. in this context the degree of managerial self serving behavior becomes irrelevant and no relation between fractional ownership and firm value should be expected ex ante. these arguments emphasize the importance of considering the endogenous nature of managerial fractional ownership in the empirical tests. accordingly, when attempting to control for the endogeneity in the relationship between managerial ownership and firm performance, some studies have failed to find a positive relationship between the two (demsetz & lehn 1985, himmelberg et al. 1999). corporate payout policy managerial equity ownership is related to the corporate payout policy in the following ways. first, it can mitigate a free cash flow problem, which arises when an entrenched manager spends internally generated cash flows on value destroying projects instead of returning the funds to investors via dividends and share repurchases (jensen 1986). if higher managerial ownership aligns the interests of managers and shareholders, firms in which managers hold more equity are expected to have greater payouts. testing this prediction, fenn & liang (2001) find that managerial stock ownership is associated with higher payouts, but only in firms characterized by the greatest agency problems those with low managerial ownership and scarce growth opportunities. second, executive stockand option holdings have different implications for the composition of the corporate payout. the value of non-dividend protected options, however, decreases with the dividend yield, as is also evident and holders of such options forego dividends which they could otherwise receive were the options converted into shares. thus, ceteris paribus, executives holding more options are expected to have a greater preference for stock repurchases relative to dividends as a form of corporate payout. in contrast, shareholdings capture both the dividends and value increases from stock repurchases to the same extent. the managers, however, are often restricted from selling their shares (core & guay 1999) and may not be able to immediately benefit from the share repurchases. in this respect, executives with greater shareholdings may favor dividends over repurchases as a form of corporate payout for personal liquidity reasons. these theories fail to explain nigeria issues. empirical review frydman and saks (2010) examine long-term executive compensation trends using an extensive dataset of large firms from 1936 to 2005. their results agree with those of hall and liebman (1998), finding a large increase in payto-performance based on two measures, the jensen–murphy statistic and the value of equity at stake, during the 1980s and 1990s. nagar et al. (2003) approach the issue of incentive alignment through stock-based compensation by focusing on disclosure agency problems. their main argument is that managers are more likely to communicate their private information to shareholders if their compensation is tied more closely to the firm’s equity value. otherwise, managers are not willing to reveal their private information because of the possible private benefits of retaining such information. zhou (2001) the firm fixed effect specification employed by himmelberg et al. (1999) was unlikely to be powerful enough, because managerial ownership changes vary slowly over time, rendering detection of any positive relationship impossible. with these caveats in mind, the subsequent studies in this area focus on refining econometric models, by both taking into account the endogeneity between managerial ownership and firm www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 22 performance and attempting to overcome a problem of insufficient intertemporal variation in the levels of ownership. mcconnell et al. (2008) approach the problem by investigating a short-term market reaction to increases in insider ownership resulting from share purchases and find a curvilinear relationship. fahlenbach & stulz (2009) examine the effect of large changes in managerial ownership on firm value and report an asymmetric relation: large increases in ownership increase firm value, while large decreases are not related to firm performance. benson & davidson (2009) investigate the relation between the dollar value of managerial ownership and firm performance by justifying their choice of ownership measure with the argument that the dollar value of ownership varies to a greater extent over time than the fractional ownership. fenn & liang (2001) find that firms with greater managerial option holdings increase repurchases at the expense of dividends. kahle (2002) reports that companies decide to repurchase options both in order to offset share dilution from broad-based option plans and when managerial wealth is expected to be adversely impacted by the dividend payments, that is, when managers hold many options. cuny et al. (2009) find that executive stock options are associated with lower total payouts and conclude that incentives from the lack of dividend protection of options dominate those related to the anti dilution effect of broad based option plans in the decision on the magnitude of a total corporate payout. brav et al. (2005) find little support for the notion that companies prefer repurchases over dividends because employee stock options are not dividend protected. with respect to the prediction that managerial stock ownership encourages payouts in the form of dividends, brown et al. (2007) report that companies in which managers held large amounts of shareholdings increased dividend payments following the enactment of the jobs and growth tax relief reconciliation act in 2003, which reduced the dividend tax rate from 38.6% to 15%. the findings regarding an impact of executive ownership structure on the corporate payout policy generally suggest that executives view dividends as an important component of their personal firm-related income. the role of this dividend income in the executive compensation decisions is studied in the fourth essay.nagar et al. (2003) use two measures to proxy for the extent of these disclosures: the frequency of management earnings forecasts and analysts’ ratings of disclosures taken from the association for investment management research survey. consistent with their conjecture, both measures are found to be positively associated with the proportion of ceo pay linked to stock prices. voluntary disclosures may also reduce the contracting costs associated with stock-based compensation. new employees whose remuneration is tied to stock prices will require extra compensation for the additional risk they bear in case of mispriced company stock. thus, firms that heavily rely on stock-based compensation schemes are more likely to make voluntary disclosures to reduce the information asymmetry between managers and shareholders (healy & palepu, 2001). barth (2003) questions the actual benefits that shareholders gain from more frequent managerial disclosures because stock-based compensation can also incentivize managers to distort such disclosures. aboody and kasznik (2000) found that managers release self-serving forecasts to maximize the value of their stock option awards by announcing bad news and delaying good news around the award date. shareholders may not use the information from managerial disclosures if they do not know whether the managers reveal true information. cheng and lo (2006) report that managers engage in more selling activities during periods of increased disclosures of bad newsman, noe (1999) also indicates that insider trading tends to follow management forecasts. however, managers will act in a subtle manner when capitalizing on private information due to legal restrictions on insider trading. insider trading would be associated with less sensitive private information, such as the firm’s long-term performance, rather than biased disclosures regarding short-term performance. in this case, shareholders will be able to learn about future performance either directly through the private information embedded in voluntary disclosures or indirectly by watching the managers’ trading patterns (the informative disclosure argument). smith & stulz (1985) and milgrom & roberts (1992) suggest that the riskrelated agency problems are most severe in growing firms, therefore growing firms are supposed to provide managers with more convex compensation structures. guay (1999) reports that managers in firms with more valuable growth opportunities have greater risk-taking incentives, whereas greater managerial risk-taking incentives are associated with higher stock return volatility. this finding implies that convex compensation schemes affect the riskiness of investing and financing decisions. coles et al.(2006) employ a simultaneous equations empirical research design and find that a higher vega implements riskier corporate policies, while at the same time riskier policy choices lead to compensation structures with higher vega and lower delta. the firm risky choices in their study are measures as higher r&d investment, lower capital expenditures, higher leverage, narrower corporate focus and greater stock return volatility. low (2009) investigates how an exogenous shock to the corporate risk environment affects firm compensation policies and documents that companies respond to it by providing managers with greater risk-taking incentives. chava & purnanandam (2010) extend this line of research by comparing the effect of risk-taking incentives of both a ceo and a cfo on the broad set of corporate policies and find that the predicted relations are present when a particular executive has a greater discretion over a specific corporate choice. other studies investigate the effect of www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 23 managerial risk-taking incentives on other dimensions of corporate risk such as tax aggressiveness (rego & wilson 2012), risky financial reporting choices (armstrong et al. 2013), volatility of idiosyncratic and systematic components of firm stock return (armstrong & vashishtha 2012), and degree of hedging activity (knopf et al. 2002, rogers 2002). ross (2004) shows theoretically that for a risk-averse manager the compensation schedule moves the evaluation of a given gamble to a different part of the domain of her original utility function, where the manager may be less or more risk averse. in other words, the agent assesses the risk from the perspective of being wealthier and this effect may offset the impact of the compensation convexity. lewellen (2006) takes into account the effect of managerial risk aversion and quantifies volatility cost of debt as a change in manager’s certainty equivalent induced by changes is firm leverage. her results suggest that stock options, especially that in-the money, discourage managerial risk-taking. hayes et al. (2012) use these arguments to explain the lack of reduction in the riskiness of corporate investment and financing policies following an exogenous decrease in managerial vega incentives triggered by the adoption of. in sum, the role of option-based compensation in mitigating risk-related agency problem is not fully understood. from the literature, it is evidence that none of the studies examine the nigeria situation and the findings of the studies failed to establish valid relationship between corporate characteristics and share based payment. this study therefore intends to examine the influence of corporate characteristics and share based payments in nigeria 3. research methodology this study intends to examine the influence of corporate characteristics on share based payment. ex-post facto research design was employed in obtaining, analyzing and interpreting the relevant data for hypotheses testing. the rationale for the variety is that ex-post facto research design allows the researcher the opportunity of observing one or more variables over a period of time. specifically, panel data were adopted in data analysis. the dataset employed in this study were generated from nigeria stock exchange factbook and financial reports and statement of accounts of quoted financial firms in nigeria. firm annual statements and reports are deemed to be reliable because they are statutorily required to be audited by a recognized auditing firm before publication. panel data structure allows us to take into account the unobservable and constant heterogeneity, that is, the specific features of each quoted firm. the researcher employed pooled ordinary least square (ols), fixed effects and random effects regression models to test the various hypotheses. pooled ols egression technique is popular in financial studies owing to its ease of application and precision in prediction (alma, 2011). these analytical techniques will enable the researcher attain justifiable and robust results.   xity 10 3.1 where y = dependent variable xit1 = independent variable 0 = regression intercept  = error term disaggregating equation 3.1 to form the multiple regression models, we have  riskliqmepfccfstabcgderfsbp ,,,,,,,, 3.2 transforming equation 3.2 to econometrics form, we have   riskliqmepfccfstabcgdersbp 987654320 3.3 where sbp share base payment as percentage of share based payment to total equity der = debt equity ratio cg = corporate governance proxy by dummy variable tab = tangibility fixed assets to total assets fs = firm size proxy by log of total asset cc = cost of capital proxy wacc pf = profitability proxy by return on investment me = management efficiency total cost to total revenue liq = liquidity proxy by current asset to current liabilities risk = risk proxy by variability of earnings formulating hypothesis from the above model: h01: there is no significance relationship between debt equity ratio and share base payment h02: there is no significance relationship between corporate governance and share base payment www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 24 h03: there is no significance relationship between tangibility and share base payment h04: there is no significance relationship between firm size and share base payment h05: there is no significance relationship between cost of capital and share base payment h06: there is no significance relationship between profitability and share base payment h07: there is no significance relationship between management efficiency and share base payment h08: there is no significance relationship between liquidity and share base payment h09: there is no significance relationship between risk and share base payment formulating model for hypotheses testing hypothesis i sbp = 0 +  der1 3.4 hypothesis ii sbp = 0 +  cg2 3.5 hypothesis iii sbp = 0 +  tab3 3.6 hypothesis iv sbp = 0 +  fs4 3.7 hypothesis v sbp = 0 +  cc5 3.8 hypothesis vi sbp = 0 +  pf6 3.9 hypothesis vii sbp = 0 +  me7 3.10 hypothesis viii sbp = 0 +  liq8 3.11 hypothesis ix sbp = 0 +  risk9 3.12 null hypotheses; h0: β = 0, (statistically not significant) alternate hypotheses; h1: β  0. (statistically significant) and the decision rule states that “h0” should be rejected when t-statistics is greater than the critical value. but when the t-statistics is lower than the critical value, the “h0” is accepted with its conclusion. 4. presentation of results and discussion of findings table 1: test of models redundant fixed effects tests effects test statistic d.f. prob. cross-section f 1.587346 (9,41) 0.1514 cross-section chi-square 17.936983 9 0.0359 source: e-view windows 9.0 for the purpose of decision making regarding choice between fixed and random effects hausman test was run. the decision of choice between fixed and random effect is based on p-value of hausman test. if the p value of the hausman test is less than 0.05, we have a preference to use a fixed effects model. on the other hand if the p-value of the hausman test is more than 0.05, we select to use fixed effects. in this study, the p-value of hausman test was more than 0.05 so fixed effects are used. for comparison purpose pooled regression results are also given. value may be shown as f-value. “f” value of the table signifies whether the overall model is statistically significant or not. the more the f value or wald chi square test value the more the model is considered not significant. table 2: presentation of results: the pooled effect correlated random effects hausman test test summary chi-sq. statistic chi-sq. d.f. prob. cross-section random 14.286114 9 0.1125 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 25 variable coefficient std. error t-statistic prob. tab 0.232160 0.831262 0.279287 0.7812 roi 0.252097 0.278787 0.904263 0.3702 risk 0.006027 0.609468 0.009888 0.9921 me -0.227593 0.094745 -2.402178 0.0201 liq 0.001599 0.003008 0.531496 0.5974 fs 0.011750 0.099352 0.118270 0.9063 der -0.097781 0.099465 -0.983075 0.3303 cg -0.977813 1.536550 -0.636369 0.5274 cc -1.329340 0.799668 -1.662364 0.1027 c 40.82592 12.40824 3.290227 0.0018 r-squared 0.221080 durbin-watson stat 1.768800 adjusted r-squared 0.080875 f-statistic 1.576831 prob(f-statistic) 0.148081 source: e-view windows 9.0 one of the assumptions of the fixed effect model is that unique features of the entities ought not to be correlated with other distinct features. if the error terms are correlated then fixed effect is not considered a fit choice and the results may not be trustworthy and as a result random-effects will have to be used. the logical reason on the back of usage of the random effects model is that, in contrary to the fixed effects model, the variation in entities is assumed to be random and unrelated with the independent variables of the model. one of the merits of random effects is that invariable variables may be included. in fixed effects model these variables are absorbed by the intercept. table 2 show the details analysis of the pooled effect regression results on the effect of corporate characteristics and its influence on share base payment of financial service firms in nigeria. looking at results it is evidenced that the independent variables can explain 22.1% variation on the dependent variable which is the percentage of share base payment to total equity of the selected financial service firms. the f-statistics and the probability coefficient show that the model is not significant this means that the independent variables cannot significantly explain variation on the dependent variable. the t-statistics and probability coefficient of the independent variables indicates that all the variables are statistically not significant at 5% level of significance. the β coefficient indicates that tangibility, return on investment, risk, liquidity, firm size have positive relationship with share base payment of the selected financial service firms while management efficiency, debt equity ratio, corporate governance and cost of capital have negative relationship with share base payment. the insignificant and negative impact of the variables could be traced to the fact that most corporate organizations in nigeria does not engage in share base payment. table 3: presentation of results: the fixed effect variable coefficient std. error t-statistic prob. tab -1.101803 1.048111 -1.051228 0.2993 roi 0.364802 0.305401 1.194502 0.2391 risk -0.240735 1.087112 -0.221444 0.8258 me -0.158620 0.123862 -1.280618 0.2075 liq 0.002424 0.003204 0.756429 0.4537 fs 0.013894 0.101810 0.136475 0.8921 der -0.069284 0.107056 -0.647174 0.5211 cg -0.647809 1.542201 -0.420055 0.6766 cc -0.481787 1.259064 -0.382655 0.7040 c 43.48345 15.09703 2.880265 0.0063 r-squared 0.422356 durbin-watson stat 2.225778 adjusted r-squared 0.168756 f-statistic 1.665442 prob(f-statistic) 0.088026 source: e-view windows 9.0 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 26 the fixed effect regression results of variables is table 3 show the details analysis of the effect of the independent variables on the dependent variables. looking at results it is it is evidenced that the independent variable can explain 42.2% variation on the dependent variable. the f-statistics and f-probability shows that the model is significant at 5% level of significance. the durbin watson statistics shows a coefficient of less than 2.50 but greater than 2.0 which implies the presence of positive serial auto correlation. the β coefficient of the independent variables shows that tangibility, risk, management efficiency, debt equity ratio, corporate governance and cost of capital have negative relationship with the dependent variable while return on investment; liquidity and firm size have positive relationship with the dependent variable. however, the t-statistics and the probability prove that the independent variables are statistically not significant. this implies that variation on the independent variable have no good impact on the dependent variable. this proves that most firms in nigeria do not adopt the method of share base payment to employees and other stake holders of the firm. table 4: presentation of results: the random effect source: e-view windows 9.0 table 4 shows the random effect regression results of the independent variables on the dependent variables. evidence from the random effect as shown in the above table indicates that the independent variables can explain 42.0% variation on the dependent variable. the f-statistics and f-probability justifies that the model is significant. the durbin watson statistics is less than 2.50 but greater than 2.0 justifying the presence of positive serial auto correlation. the β coefficient shows that return on investment, risk, firm size debt equity ratio, corporate governance and cost of capital have negative relationship with the dependent variable while tangibility, management efficiency, and liquidity have positive relationship with the dependent variable. the t-statistics and probability shows that the independent variables are statistically not significant. test of hypothesis table 5: presentation of results: the fixed effect variable t-statistic critical t prob. level sig decision tab -1.051228 <2.020 0.2993 >0.05 accept h0 roi 1.194502 <2.020 0.2391 >0.05 accept h0 risk -0.221444 <2.020 0.8258 >0.05 accept h0 me -1.280618 <2.020 0.2075 >0.05 accept h0 liq 0.756429 <2.020 0.4537 >0.05 accept h0 fs 0.136475 <2.020 0.8921 >0.05 accept h0 der -0.647174 <2.020 0.5211 >0.05 accept h0 cg -0.420055 <2.020 0.6766 >0.05 accept h0 cc -0.382655 <2.020 0.7040 >0.05 accept h0 source: e-view windows 9.0 variable coefficient std. error t-statistic prob. c 41.101803 0.232160 1.473609 0.0526 tab 0.364802 0.252097 1.022979 0.4572 roi -0.240735 0.006027 0.845877 0.7885 risk -0.158620 0.227593 0.007224 0.4171 me 0.002424 0.001599 0.000002 0.5676 liq 0.013894 0.011750 0.001438 0.9549 fs -0.069284 0.097781 0.002514 0.5698 der -0.647809 0.977813 0.243139 0.5033 cg -0.481787 1.329340 1.006914 0.3983 cc -1.101803 0.232160 0.473609 0.0526 r-squared 0.420073 durbin-watson stat 2.32487 adjusted r-squared 0.378485 f-statistic 4.645322 prob(f-statistic) 0.027845 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 27 in testing the significant effect of the variable, the fixed effect model using the t-statistics and the probability coefficient. from the table above, the t-statistics of the ind4ependent variables are less than the critical t-value of + 2.020. it therefore rejects the alternate hypothesis and accepts the null hypothesis that there is no significant relationship between corporate characteristics and share base payment of the financial service firms. 5. conclusion and recommendations the determinants of share based payment are those characteristics which are found to have a significant relation in the linkage between companies´ characteristics and share based payment. to understand better how the use of share based payment can be a very important method for monitoring employees and decreasing the asymmetry of interest between agent and principal, the effect corporate factors on share based payment has been studied. the negative relation between share based payment and corporate features indicates that the factice of share based payment is not fully practice in most firms. from the findings, the pooled effects could only explain 22.1% variation on the dependent variable. all the independent variables are statistically not significant. from the fixed effect the independent variables can explain 42.2% variation on the dependent variable; 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(2004). compensation, incentives, and the duality of risk aversion and riskiness. the journal of finance 59(1), 207-225. smith, c., & stulz , r., (1985). the determinants of firms' hedging policies. journal of financial and quantitative analysis 20(4), 391-405. yermack, d., (1997). good timing: ceo stock option awards and company news announcements. journal of finance,30(2), 401-423. zhou, x .,(2001). understanding the determinants of managerial ownership and the link between ownership and performance: comment. journal of financial economics 62(3), 559-571. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) asian finance & banking review; vol. 2, no. 2; 2018 issn 2576-1161 e-issn 2576-1188 impact factor: 3.3 published by centre for research on islamic banking & finance and business 14 whither financial inclusion? performance of bangladesh in the 2017 global findex sajid amit 1 1 director, ces, university of liberal arts, dhaka, bangladesh correspondence: sajid amit, assistant professor & director, center for enterprise and society, university of liberal arts, dhaka, bangladesh. email: sh2367@caa.columbia.edu. tel: +880-2-966-1255. to cite this article: amit, s. (2018). whither financial inclusion? performance of bangladesh in the 2017 global findex. asian finance & banking review, 2(2), 14-18. retrieved from http://www.cribfb.com/journal/index.php/asfbr/article/view/12 received: august 9, 2018 accepted: august 13, 2018 online published: august 15, 2018 abstract on april 19, 2018, the third global findex database was released by the world bank at the bank’s spring meetings. according to cgap, this dataset is “the financial inclusion community’s best demand-side measure of financial inclusion globally.” overall, the dataset points to an increasingly inclusive financial world that is also transitioning to a digital economy. bangladesh, too, made impressive gains in certain yardsticks for financial inclusion based on this dataset. for instance, the share of people with financial accounts increased from 29 percent to 41 percent, in three years. however, financial inclusion yardsticks should go beyond opening of bank and financial accounts and also encompass usage of accounts. it is only when people are actively using their accounts will we have meaningful financial inclusion. keywords: financial inclusion global findex, bangladesh. 1. background on april 19, 2018, the third global findex database was released by the world bank at the bank’s spring meetings. according to cgap, i this dataset is “the financial inclusion community’s best demand-side measure of financial inclusion globally.” ii queen maxima of the netherlands, a strong and vocal proponent of financial inclusion, iii opined, “for those of us committed to advancing financial inclusion, no tool is of greater value than the global financial inclusion (global findex) database.” iv launched with funding from the bill & melinda gates foundation, the findex database now has three years of time series data available, for 2011, 2014, and 2017, which can tell a compelling tale on access to financial services over the past 6 years. in terms of methodology, the research consists of nationally representative surveys of more than 150,000 adults, age 15 and above, in over 140 countries. the survey was conducted in collaboration with gallup, inc. the final dataset is publicly available on the world bank group website, on which this article is based. overall, the dataset points to an increasingly inclusive financial world that is also transitioning to a digital economy. between 2014 and 2017, 515 million adults globally opened some sort of formal financial institution account. v www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 15 while financial inclusion has taken great strides, nearly half of all unbanked adults live in just seven economies, including bangladesh (fig 1). 2. performance of bangladesh however, bangladesh, too, made impressive gains in certain yardsticks for financial inclusion. for instance, the share of people with financial accounts increased from 29 percent to 41 percent, in three years. this may appear to be high and is an outcome of the fact that the world bank definition of a financial account included bank accounts or accounts at other financial institutions such as microfinance institutions, cooperatives, and credit unions. those without a financial institution account were asked their reasons for not owning one. about 62 percent cited insufficient funds as a reason for not owning a financial account. other reasons frequently cited include “someone in the family has an account,” “financial services are too expensive,” “financial institutions are too far away,” and “lack of necessary documentation” (fig 2). moreover, while 50 percent of bangladeshi males have a financial institution account, only 32 percent of females do (fig 3). the growth for males over the last 3 years is 17 percentage points while the growth for females is 7 percentage points. this is interesting given that the world bank measure of a financial account includes microfinance institutions, the primary account holders for which, are women. this may indicate that the more recent bangladesh 3% china 13% india 11% indonesia 6% mexico 3% nigeria 4% pakistan 6% rest of the world 54% fig 1: adults w/o fi account by economy (percent) 2017 0% 10% 20% 30% 40% 50% 60% 70% lack of necessary documentation religious reasons insufficient funds no need for financial services fig 2: reasons for not owning an fi account source: global findex database www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 16 progress in financial inclusion may have been driven more by mobile money accounts than by microfinance accounts. looking at remittance-related data, a more positive picture emerges. the share of people sending or receiving remittances increased from 19 percent to 29 percent, according to the findex data. among those who sent remittances, the share of senders who used a financial institution account increased from 9 percent to 17 percent. meanwhile, senders who used a mobile phone to send remittances increased from 33 percent to an impressive 69 percent. senders who sent remittances in cash and using in-person delivery, decreased from 53 percent to 23 percent (fig 4). clearly, remittance sending is moving from informal to institutional channels, which bodes well. significant gains have also been made with respect to paying utility bills through a financial institution account. among those who paid utility bills, the share of those who paid through an account increased from 4 percent to 31 percent. this is indicative of the growth potential of agent banking in bangladesh as agents are encouraged to collect utility bills as a way of generating revenue for themselves, outside of the banking services they promote. in general, in the realm of digital, significant gains are noticeable. for instance, in three years, share of people with mobile money accounts increased seven times, from 3 percent to 21 percent (fig 5). share of people who made or received digital payments increased from 7 percent to 34 percent. 0% 10% 20% 30% 40% 50% 60% 70% 80% male female fig 3: breakdown of fi account ownership ownership of fi accounts growth in 2014-17 (percentage points) source: global findex database 0% 20% 40% 60% 80% using a financial institution using a mobile phone in person and in cash only fig 4: preferred channels for remitting 2017 2014 source: global findex database www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 17 however, there is a persistent gender gap in the realm of digital financial services as well. although the ownership of mobile money accounts among women has increased five times in the last three years, it is still at 10 percent, compared to 32 percent for men (fig 6). in addition to such persistent inequalities, there is considerable scope for improvement with respect to usage of accounts. usage clearly trails access and financial inclusion cannot be merely about increasing the number of accounts but also ensuring people are using their accounts. among those with a financial account, people who made deposits went down from 60 percent to 51 percent (fig 7). cumulatively, the share of people who made withdrawals or deposits stayed about the same. 0% 5% 10% 15% 20% 25% 30% 35% 40% mobile money account ownership made or received digital payments in the past year received digital payments in the past year made digital payments in the past year fig 5: digital financial services usage 2017 2014 source: global findex database 0% 5% 10% 15% 20% 25% 30% 35% total male female fig 6: mobile money account ownership 2017 2014 0% 20% 40% 60% 80% deposit in the past year no deposit and no withdrawal in the past year fig 7: insufficient usage of fi accounts 2014 2017 source: global findex database www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 18 3. conclusion referring to the 2017 global findex, ms. greta bull, ceo of cgap and a director at the world bank group, had to say, “i have been working in the financial inclusion industry for 18 years, and i have never seen the kinds of gains in access we have seen over the past decade. it is an exciting time to be involved in financial inclusion.” vi while that certainly may be the case, and the focus on financial inclusion by governments and the private sector appear to be intensifying globally, it is important to take stock of both the achievements and the areas for improvement. recent progress around the world and in bangladesh have been driven by a mixture of a push towards digital payments, favorable government policies, and a new generation of financial services accessible via mobile phones and the internet. globally, companies pay wages in cash to hundreds of millions of unbanked adults. a transition to an electronic payroll could help these workers join the formal financial system and also ensure transparency and accountability of the financial function at these companies. this is true for bangladesh as well. for instance, if the large ready-made garments (rmg) manufacturers adopted such initiatives at digital transformation, millions could benefit in the long run. certain international donor-funded projects that are working with agent banking units of private commercial banks are trying to encourage banks to adopt such practices. last but not the least, all stakeholders involved ought to prioritize the focus on usage of accounts. it is only when people are actively using their accounts will we have meaningful financial inclusion, and the impact of ongoing efforts will be fully realized. references i cgap (the consultative group to assist the poor) is a global partnership of more than 30 leading organization that seek to advance financial inclusion. it is housed at the world bank. ii bull, greta. (2018). new global findex: what you need to know. cgap blog. available at: http://www.cgap.org/blog/new-global-findex-what-you-need-know iii her majesty queen máxima of the netherlands is un secretary-general’s special advocate for inclusive finance for development and honorary patron of the g-20’s global partnership for financial inclusion. iv demirgüç-kunt, asli, leora klapper, dorothe singer, saniya ansar, and jake hess. 2018. the global findex database 2017: measuring financial inclusion and the fintech revolution. washington, dc: world bank. v data on adults with a financial institution account include respondents who reported having an account at a bank or at another type of financial institution, such as a creditunion, a microfinance institution, a cooperative, or the post office (if applicable), or having a debit card in their own name vi bull, greta. (2018). new global findex: what you need to know. cgap blog. available at: http://www.cgap.org/blog/new-global-findex-what-you-need-know copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) contents asian finance & banking review vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business 1 socioeconomic impacts of microfinance programs in the development of bangladesh rezaul karim1 1 department of business administration, atish dipankar university of science and technology, dhaka, bangladesh correspondence: department of business administration, atish dipankar university of science and technology, dhaka, bangladesh, e-mail: rezaul.karim00@gmail.com received: june 21, 2017 accepted: july 15, 2017 online published: july 25, 2017 abstract the study was conducted to find out what significant socioeconomic impact and how microfinance programs play the key role on the development of bangladesh. to observe that we tried to find out in which way it is playing its role and what kind of socioeconomic impacts are related with microeconomic programs. microfinance programs are providing a significant role in the development of bangladesh by providing financial assistance to the lower income but self-employed people. they have turned into employed by getting the financial support from the different institutions especially from grameen bank, brac etc. the poverty level has minimized a lot from the rural area and household income increase by around one-third. wages and marginal propensity to consumption (mpc) increased especially for women and it creates positive impact on children's schooling: a 1.05% increase in grameen bank female borrowers increases the probability of school enrollment by 1.8% for girls and 1.99% for boys. microfinance also contributed to smoothening consumption level and reducing vulnerability of life of people. it plays a role in eradicating poverty, promoting education, improving health and empowering women. keywords: gdp, ngo, mpc, microfinance, socioeconomic impact. 1. introduction schreiner and colombet (2001, p.339) define microfinance as “the attempt to improve access to small deposits and small loans for poor households neglected by banks.” therefore, microfinance involves the provision of financial services such as savings, loans and insurance to poor people living in both urban and rural settings who are unable to obtain such services from the formal financial sector. according to otero (1999, p.8) microfinance is “the provision of financial services to low-income poor and very poor self-employed people”. these financial services according to lidgerwood (1999) generally include savings and credit but can also include other financial services such as insurance and payment services. micro credit and microfinance are relatively new terms in the field of development, first coming to prominence in the 1970s, according to robinson (2001) and otero (1999). prior to then, from the 1950s through to the 1970s, the provision of financial services by donors or governments was mainly in the form of subsidized rural credit programmers. these often resulted in high loan socioeconomic impacts of microfinance programs in the development of bangladesh rezaul karim 2 defaults, high lose and an inability to reach poor rural households (robinson, 2001). robinson states that the 1980s represented a turning point in the history of microfinance in that mfis such as grameen bank began to show that they could provide small loans and savings services profitably on a large scale. they received no continuing subsidies, were commercially funded and fully sustainable, and could attain wide outreach to clients (robinson, 2001). it was also at this time that the term “micro credit” came to prominence in development (mix, 2005). the 1990s “saw accelerated growth in the number of microfinance institutions created and an increased emphasis on reaching scale” (robinson, 2001, p.54). dichter (1999, p.12) refers to the 1990s as “the microfinance decade”. microfinance had now turned into an industry according to robinson (2001). along with the growth in micro credit institutions, attention changed from just the provision of credit to the poor (micro credit), to the provision of other financial services such as savings and pensions (microfinance) when it became clear that the poor had a demand for these other services (mix, 2005). the importance of microfinance in the field of development was reinforced with the launch of the micro credit summit in 1997. the summit aims to reach 175 million of the world‟s poorest families, especially the women of those families, with credit for the self-employed and other financial and business services, by the end of 20154 (micro credit summit, 2005). more recently, the un, as previously stated, declared 2005 as the international year of micro credit. 2. literature review microfinance has a very important role to play in development according to proponents of microfinance. uncdf (2004) states that studies have shown that microfinance plays three key roles in development. it:  helps very poor households meet basic needs and protects against risks,  is associated with improvements in household economic welfare,  helps to empower women by supporting women‟s economic participation and promotes gender equity. otero (1999, p.10) illustrates the various ways in which “microfinance, at its core combats poverty”. she states that microfinance creates access to productive capital for the poor, which together with human capital, addressed through education and training, and social capital, achieved through local organization building, enables people to move out of poverty. by providing material capital to a poor person, their sense of dignity is strengthened and this can help to empower the person to participate in the economy and society (otero, 1999). the aim of microfinance according to otero (1999) is not just about providing capital to the poor to combat poverty on an individual level, it also has a role at an institutional level. it seeks to create institutions that deliver financial services to the poor people, who are continuously ignored by the formal banking sector. littlefield and rosenberg (2004) state that the poor are generally excluded from the financial services sector of the economy, so mfis have emerged to address this market failure. by addressing this gap in the market in a financially sustainable manner, an mfi can become part of the formal financial system of a country and so can access capital markets to fund their lending portfolios, allowing them to dramatically increase the number of poor people they can reach (otero, 1999). more recently, commentators such as littlefield, murduch and hashemi (2003), simanowitz and brody (2004) and the imf (2005) have commented on the critical role of microfinance in achieving the millennium development goals (mdg). simanowitz and brody (2004, p.1) state, “microfinance is a key strategy in reaching the mdgs and in building global financial systems that meet the needs of the most poor people.” littlefield, murduch and hashemi (2003) state “microfinance is a critical contextual factor with strong impact on the achievements of the mdgs microfinance is unique among development interventions: it can deliver social benefits on an ongoing, permanent basis and on a large scale”. referring to various case studies, they show how microfinance has played a role in eradicating poverty, promoting education, improving health and empowering women (2003). however, not all commentators are as socioeconomic impacts of microfinance programs in the development of bangladesh rezaul karim 3 enthusiastic about the role of microfinance in development and it is important to realize that microfinance is not a silver bullet when it comes to fighting poverty. hulme and mosley (1996), while acknowledging the role microfinance can have in helping to reduce poverty, concluded from their research on microfinance that “most contemporary schemes are less effective than they might be” (1996, p.134). they state that microfinance is not a panacea for poverty-alleviation and that in some cases the poorest people have been made worse-off by microfinance. rogaly (1996, p.109/110) finds five major faults with mfis. he argues that:  they encourage a single-sector approach to the allocation of resources to fight poverty,  micro credit is irrelevant to the poorest people,  an over-simplistic notion of poverty is used,  there is an over-emphasis on scale,  there is inadequate learning and change taking place. wright (2000,p.6) states that much of the skepticism of mfis stems from the argument that microfinance projects “fail to reach the poorest, generally have a limited effect on income…drive women into greater dependence on their husbands and fail to provide additional services desperately needed by the poor”. in addition, wright says that many development practitioners not only find microfinance inadequate, but that it actually diverts funding from “more pressing or important interventions” such as health and education (2000, p.6). as argued by navajas et al (2000), there is a danger that microfinance may siphon funds from other projects that might help the poor more. they state that governments and donors should know whether the poor gain more from microfinance, than from more health care or food aid for example. therefore, there is a need for all involved in microfinance and development to ascertain what exactly has been the impact of microfinance in combating poverty. considerable debate remains about the effectiveness of microfinance as a tool for directly reducing poverty, and about the characteristics of the people it benefits (chowdhury, mosley and simanowitz, 2004). sinha (1998) argues that it is notoriously difficult to measure the impact of microfinance programs on poverty. this is so she argues, because money is fungible and therefore it is difficult to isolate credit impact, but also because the definition of „poverty‟, how it is measured and who constitute the „poor‟ “are fiercely contested issues” (1998, p.3). poverty is a complex issue and is difficult to define, as there are various dimensions to poverty. for some, such as world bank, poverty relates to income, and poverty measures are based on the percentage of people living below a fixed amount of money, such as us$1 dollar a day (world bank, 2003). 3. objectives of the research the objectives of the research include the following  to identify the key socioeconomic impacts of microfinance in bangladesh.  to find out in which way microfinance is playing the role in the development process of bangladesh.  to assess the impact to the livelihoods of project beneficiaries.  to show what learning can be gained when socioeconomic impact assessments have a broad scope of analysis.  to show some guidelines of the micro finance programs for more effective implementation in the development of bangladesh. 4. methodology of the research this research is a descriptive type of research that has undertaken insights and understanding about overall operation of socioeconomic development of bangladesh and prepared on the basis of secondary sources. the secondary information was collected from different past files, which were collected from personal visit of the company files. socioeconomic impacts of microfinance programs in the development of bangladesh rezaul karim 4 5. a brief overview of ngos-mfis in bangladesh 5.1 sector highlights table 1: microfinance industry in bangladesh 1 number of ngo-mfis covered here 425 2 number of branches 11461 3 total employees 104,327 a) male 87407 b) female 16920 4 total members (in millions) 20.83 a) male 3.06 b) female 17.77 5 total borrowers (in millions) 17.01 a) male 1.69 b) female 15.32 6 total savings (in million taka) 27759.38 7 outstanding loan (in million taka) 85872.94 8 average savings per member (in taka) 1333 9 average outstanding loan per borrower (in taka) 5048 10 average borrower to member ratio (in percentage) 82% 11 average savings to outstanding loan ratio (in percentage) 32% the microcredit regulatory authority (mra) has classified of these 425 ngo-mfis and their market share by categorizing as very small, small, medium, large, and very large on the basis of their number of borrowers, which are presented by the table. besides these 425 institutions, there are more than 2500 tiny institutions which have either less than 1000 borrowers or less than tk. 40 lacs (tk. 4 million) loan outstanding. among these 425 institutions, only 13 (3% of 425) institutions actually occupy the major share of the market both in terms of loan outstanding (81.47%) and savings collection (76.35%), where in fact the largest two institutions have 65.93% and 57% share respectively. but it is noticeable that all institutions except very large two are having more market share in total savings than their share in total outstanding loan and 323 very small institutions have 6.49% of market share in savings collection where as they have only 4.36% share in loan outstanding. socioeconomic impacts of microfinance programs in the development of bangladesh rezaul karim 5 table 2: ngos-mfis classification criteria number of institutions under different categories category of mfis on the basis of borrowers no. of mfis on the basis of borrowers % of number of mfis % of loan outstanding (principle) % of total savings very small <10,000 323 76.00% 4.36% 6.49% small >or = 10,000 but <50,000 73 17.18% 8.88% 10.18% medium >or = 50,000 but <100,000 16 3.76% 5.29% 6.97% large >or = 100,000 but <1,000,000 11 2.59% 15.54% 19.19% very large >or = 1,000,000 2 0.47% 65.93% 57.17% total 425 100.00% 100.00% 100.00% according to the mra, although a number of organizations are rising fast, the mfis sector is still dominated by a few institutions in bangladesh. the mra expects that there will be a good number of organizations which are going to in place to compete in the market and thus people will receive better services at a reasonable price in the near future. it seems to me that mra‟s activities becoming impressive according to keep its promise and responses by presenting the ngos-mfis‟ overall picture, mra‟s transparency regarding their monitoring aspects, ensuring their regular publicity and accountability according to the mandate. 5.2 sustainable livelihood framework in impact measurement we have seen that microfinance can have a wide range of impacts on households involved in the project, but also can have wider social impacts. there are different ways of measuring impact such as using social performance assessments (spas), aims toolkit and internal learning systems. most assessments use quantitative research tools such as surveys, financial ratios and participatory tools, and qualitative tools such as focus group discussions and participant observation. this research is focused on the impact of microfinance on livelihood security. a livelihoods framework is people centered and aims to explain the relationships between people, their livelihoods, (macro) policies and all kinds of institutions. brockets by and fisher (2003, p.187) explain the four main components of the livelihoods framework, as used by dfid which has been widely adopted in the development field. these are:  people live within a vulnerability context i.e. they are exposed to risks such as sudden shocks, trends over time and seasonal change;  people have a number of capital assets which they draw upon to make their livelihoods;  these assets are drawn upon within people‟s livelihood strategies;  policies, institutions and processes help to shape people‟s assets, livelihood activities and the vulnerability context within which they live. carney (1998) states that an examination of the five capital assets offers a holistic analysis of people‟s socioeconomic impacts of microfinance programs in the development of bangladesh rezaul karim 6 livelihoods. these capital assets from the centerpiece of people‟s livelihoods as these assets dictate the level of vulnerability of beneficiaries to shocks and trends. policies and institutions also have an impact on these assets. these policies and institutions, and beneficiaries‟ own vulnerability context influence their livelihood strategies which in turn dictate their livelihood outcomes as indicated in figure.1 (ibid.). ids (2004) also states that such a framework allows investigation into the ways in which a project directly and indirectly affects people‟s livelihoods. this framework therefore will be used in this study to assess the impact of microfinance on the beneficiaries‟ livelihoods by focusing on its impact on their five capital assets. fig. 1 sustainable livelihood framework. (taken from dfid sustainable livelihoods guidance sheets, section two) 6. socioeconomic impacts of microfinance programs the major socioeconomic impacts of microfinance programs are given below: 6.1 development process microfinance has a very important role to play in development according to proponents of microfinance. uncdf (2004) states that studies have shown that microfinance plays three key roles in development. it:  helps very poor households meet basic needs and protects against risks,  is associated with improvements in household economic welfare,  helps to empower women by supporting women‟s economic participation and so promotes gender equity. there are various ways in which “microfinance, at its core combats poverty and microfinance creates access to productive capital for the poor, which together with human capital, addressed through education and training, and social capital, achieved through local organization building, enables people to move out of poverty. by providing material capital to a poor person, their sense of dignity is strengthened and this can help to empower the person to participate in the economy and society. the aim of microfinance is not just about providing capital to the poor to combat poverty on an individual level, it also has a role at an institutional level. it seeks to create institutions that deliver financial services to the poor, who are continuously ignored by the formal banking sector. microfinance has the critical role of in achieving the millennium development goals (mdg) in bangladesh and it is a key strategy in reaching the mdgs and in building global financial systems that meet the needs of the poorest people. referring to various case studies, they show how microfinance has played a role in eradicating poverty, promoting education, improving health and empowering women. 6.2 poverty reduction poverty is more than just a lack of income and the shortcomings of focusing solely on increased income as a measure of the impact of microfinance on poverty. there is a significant difference between increasing income and reducing poverty. by increasing the income of the poor, mfis are not necessarily reducing poverty.it depends what the poor do with this money, oftentimes it is gambled away or spent on alcohol, so focusing solely socioeconomic impacts of microfinance programs in the development of bangladesh rezaul karim 7 on increasing incomes is not enough. the focus needs to be on helping the poor to “sustain a specified level of well-being” by offering them a variety of financial services tailored to their needs so that their net wealth and income security can be improved. projects in india, indonesia, zimbabwe, bangladesh and uganda which all show very positive impacts of microfinance in reducing poverty. for instance, a report on a share project in india showed that three-quarters of clients saw “significant improvements in their economic well-being and that half of the clients graduated out of poverty. there is clear evidence that the impact of a loan on a borrower‟s income is related to the level of income as those with higher incomes have a greater range of investment opportunities and so credit schemes are more likely to benefit the middle and upper poor. however, when mfis such as the grameen bank and brac provided credit to very poor households, those households were able to raise their incomes and their assets. while microfinance has much potential the main effects on poverty have been:  credit making a significant contribution to increasing incomes of the better-off poor, including women,  microfinance services contributing to the smoothing out of peaks and troughs in income and expenditure thereby enabling the poor to cope with unpredictable shocks and emergencies. 6.3 livelihood security livelihood can be defined as comprising--the capabilities, assets (including both material and social resources) and activities required for a means of living. livelihood security is “basic to well-being” and that security “refers to secure rights and reliable access to resources, food, income and basic services. it includes tangible and intangible assets to offset risk, ease shocks and meet contingencies.” livelihood security therefore, like poverty, is not just about income, but includes tangible and intangible assets, and social well-being. ngos aiming for poverty reduction need to assess the impact of their services on user‟s livelihoods. in addressing the question of the impact of microfinance, ngos must go beyond analyzing quantitative data detailing the numbers of users, and volumes and size of loans disbursed, to understanding how their projects are impacting on clients‟ livelihoods. the provision of microfinance can give poor people-the means to protect their livelihoods against shocks as well as to build up and diversify their livelihood activities. therefore when analyzing the impact of microfinance the overall impact of the microfinance services on the livelihoods of the poor needs to be taken into consideration. that is the focus of this study. 6.4. social impact we have seen that poverty and livelihood security consist of economic and social conditions, therefore, when analyzing the impact of microfinance, social impact must be assessed. the wider social impact assessment is important for an organization‟s internal learning process, as an mfi should be aware of the “full range of changes associated with its efforts and uses these to improve its performance”. it needs to be considered that social impact to relate to human capital such as nutrition, health and education, as well as social networks. impact must be assessed on each of these issues if a true picture of the impact of microfinance is to be obtained. kabeer (2003, p.110) not only refers to domains of impact but also highlights dimensions of change that should be assessed. she lists cognitive change, behavioral change, material change, relational change and institutional change as dimensions of change that need to be taken into account if the wider effects of microfinance interventions are to be understood. impact should be examined from cultural, economic, social and political domains at individual, enterprise and household levels. the wider social and economic impacts can occur through the labor market, the capital market, the market for goods consumed by poor people, through production linkages and through clients‟ participation in social and political processes. in the following sections i will socioeconomic impacts of microfinance programs in the development of bangladesh rezaul karim 8 examine the findings from wider assessments of microfinance interventions at a household and community level, to show what learning can be gained when impact assessments have a broad scope of analysis. 6.5 household level impacts health and education are two key areas of non-financial impact of microfinance at a household level. wright (2000, p.31) states that from the little research that has been conducted on the impact of microfinance interventions on health and education, nutritional indicators seem to improve where mfis have been working. research on the grameen bank shows that members are statistically more likely to use contraceptives than non-members, thereby impacting on family size. some researches acknowledge the sparse specific evidence of the impact of microfinance on health but where studies have been conducted they conclude, “households of microfinance clients appear to have better nutrition, health practices and health education than comparable non-client households”. among the examples they give is of foccas, a ugandan mfi whose clients were given health care instructions on breastfeeding and family planning. they were seen to have much better health care practices than non-clients, with 95% of clients engaged in improved health and nutrition practices for their children, as opposed to 72% for non-clients. microfinance interventions have also been shown to have a positive impact on the education of clients‟ children. again, in the study of foccas, client households were found to be investing more in education than non-client households. similar findings were seen for projects in zimbabwe, india, honduras and bangladesh. chowdhury and bhuiya (2004, p.377) assessed impact of brac‟s poverty alleviation program from a “human well-being” perspective in a program in bangladesh where they examined seven dimensions of „human well-being‟. the project included the provision of microfinance and training of clients on human and legal rights. they noted that the project led to better child survival rates, higher nutritional status, improvement in the basic level of education, and increased networking in the community. children of brac clients suffered from far less protein-energy malnutrition than children of non-members, and the educational performance of brac member‟s children was also higher than that of children in non-brac households (ibid.). brac member households spent significantly more on consumption of food items than poor non-members did and per capita calorie intake was also significantly higher. therefore, various studies and findings indicate that microfinance can, and is having very positive and diverse impacts at a beneficiary level. 6.6 women empowerment a key objective of many microfinance interventions is to empower women. mosedale (2003, p.1) states that if we want to see people empowered it means we currently see them as being disempowered, disadvantaged by the way power relations shape their choices, opportunities and well-being. she states that empowerment cannot be bestowed by a third party but must be claimed by those seeking empowerment through an ongoing process of reflection, analysis and action. women need empowerment as they are constrained by “the norms, beliefs, customs and values through which societies differentiate between women and men”. she also states that empowerment refers to the “process by which those who have been denied the ability to make strategic life choices acquire such an ability”, where strategic choices are “critical for people to live the lives they want (such as choice of livelihood, whether and who to marry, whether to have children, etc)”. therefore mfis cannot empower women directly but can help them through training and awareness-raising to challenge the existing norms, cultures and values which place them at a disadvantage in relation to men, and to help them have greater control over resources and their lives. according to littlefield, murduch and hashemi (2003), the women‟s empowerment program in nepal found that 68% of its members were making decisions on buying and selling property, sending their daughters to school and planning their family, all decisions that in the past were made by socioeconomic impacts of microfinance programs in the development of bangladesh rezaul karim 9 husbands. they refer to studies in ghana and bolivia, which indicated that women involved in microfinance projects, had increased self-confidence and had an improved status in the community (ibid.). from studies of the grameen bank and brac shows that clients of these programs suffered from significantly fewer beatings from their husbands than they did before they joined the mfi (ibid). 6.7 socioeconomic outcomes of participation in micro-financed programs in bangladesh the micro-financed participants borrow money with a great expectation that; from the borrowing they will be able to increase their income and maintain self-employment. measurement of effects of microfinance programs participants‟ in terms of consumption, nutrition, employment, net worth, schooling, fertility, etc. can tell the fact whether the borrowers are coming out from poverty or not. in order to assess these effects, impact of the cumulative amount of the participants‟ borrowing from the mfis can be considered and thus will reflect both the impact of credit and the duration of the program participation. moreover, the effects on both male and female borrowers as well as the impact on the local economy also can be measured. in a specific section we have given a very short description about the evolution of microfinance programs in bangladesh, which are mainly operated by the three major mfis; such as: the grameen bank (gb), brac, and rd-12. in order to demonstrate the overall socioeconomic impacts of microfinance programs, all three mfis are taken. the survey design illustrated by shahidur r. khandker (1998) can be described as; the analysis is based on data from a multipurpose household survey conducted in bangladesh during crop year july 1991 to june 1992, which was undertaken jointly by the bids and the world bank. the main focus of the survey is to provide data for an analysis of three major credit programs (gb, brac, and rd-12). the survey covered both program villages of each of these programs and villages in which neither these programs nor any other program providing credit or other activities operated. the survey covered both program target households (those owning no more than half an acre of land) and non-target households (those that did not meet this eligibility criteria) in both program and non-program villages. shahidur r. khandker (1998) demonstrated that participation among target households; less than half (45 percent) of all eligible households participated in micro credit programs (figure .2 (a)). figure: 2 (a) program participation among target households the participation rates were 44 percent in gb villages, 52 percent in brac villages, and 33 percent in rd-12 villages. women represented 76 percent of program participants in gb villages, 73 percent in brac villages, 44 percent in rd-12 villages, and 67 percent in all program villages. the dropout rate among participating households was 9 percent in gb villages, 8 percent in brac villages, and less than 1 percent in rd-12 villages. net program participation among target households was 40 percent for gb, 48 percent for brac and 33 percent for rd-12. the average length of program participation for current members was 3.7 years for all programs, 4.3 years for gb, 3.8 years for brac, and 2.8 years for rd-12 (figure.2 (b)).thus gb members on average had more program exposure than members of other programs. among participants who dropped out, the socioeconomic impacts of microfinance programs in the development of bangladesh rezaul karim 10 average length of program participation was 3.4 years, and it was higher for gb and brac (3.5 years) than rd-12 (2 years). figure 2 (b) length of program participation concerning the enforcement of eligibility criteria, shahidur, r. khandker (1998) illustrates that; households surveyed were asked about the extent of their land holding before they joined a program. the eligibility criterion was met by 79 percent of households in gb villages, 83 percent in brac villages, and 85 percent in rd-12 villages. these findings suggest that these micro credit programs enforce their eligibility criteria tightly. among participants who met the eligibility criterion, a larger proportion came from landless households (owning no operational holdings) than from landed households (owning no more than half an acre of land). landless households represented 55 percent of grameen participants, 65 percent of brac participants, and 58 percent of rd-12 participants (figure. 2 (c)). this suggests that brac is better at targeting the ultra-poor than gb or rd-12. figure 2(c) distribution of agricultural landholding among program participants in order to assess the impact of micro credit programs, some measure of program participation is needed. the measure was estimated using the cumulative amount of borrowing over the five-year period before the survey was conducted and assessed the impact of borrowing on household and individual-level outcomes of interest, including per capita expenditure (food and nonfood), household net worth, women‟s non land assets, labor supply of men and women, boys‟ and girls‟ school enrolment rate, contraceptive use, recent fertility (number of children born in the preceding five years), and nutritional status of children. furthermore, the measure was also conducted to determine whether micro credit programs can really alleviate the poverty or not, which means the key question arise; does micro credit reduce poverty? in a country such as bangladesh, poverty can be calculated based on nutritional requirements. according to the fao, daily consumption of 2112 calories is required to remain above the poverty line. the cost of meeting this requirement can be calculated by pricing various food items and adding a 30 percent allowance to cover the cost of nonfood items (hossain and sen 1992). as price differences were observed between villages, the poverty-line level of consumption varied from socioeconomic impacts of microfinance programs in the development of bangladesh rezaul karim 11 village to village. village cost of living indices were used to establish tk. 5270 per person per year as the cut-off for moderate poverty. any household in which per person consumption was less than 80 percent of tk. 5270 (tk. 3330) was defined as living in extreme poverty (see khandker and chowdhury 1996). see the following table presents rates of poverty and net worth by the borrowers of all three microfinance program participants: table 3: rates of poverty and net worth accumulation before and after program participation poverty variables 0-36 months 36-60 months 60+ months aggregate b. prg. b. prg. a. prg b. prg. a. prg b. prg. a. prg. a. prg. grameen bank m.p. (%) 89.5 80.7 86.5 62.4 75.8 51.7 82.9 61.6 e.p. (%) 45.6 22.8 38.4 10.50 20.8 4.2 32.9 10.3 h.n.w. (tk.) 47.156 48.518 50.863 53.367 68.980 72.844 57.189 60.014 p.c.y.con.(tk.) 3688 4393 4043 5074 4623 5672 4202 5180 h.b. (tk.) 7,829 14,391 22,207 16,234 brac m.p. (%) 81.8 67.0 85.5 76.3 78.3 69.2 81.3 70.4 e.p. (%) 38.6 13.6 31.6 13.2 32.5 14.2 34.2 13.7 h.n.w. (tk.) 64.440 65.736 67.991 69.580 63.870 66.387 65.121 67.040 p.c.y.con.(tk) 4534 5296 4183 4870 4286 4984 4335 5050 h.b. (tk.) 3,457 4,236 6,712 5,117 rd-12 m.p. (%) 85.2 71.3 79.3 60.0 71.4 59.2 80.0 63.7 e.p. (%) 27.7 10.9 28.7 7.3 32.7 18.2 29.0 10.3 h.n.w. (tk.) 41.270 41.770 44.843 45.493 32.482 34.111 41.633 42.380 p.c.y.con.(tk) 4253 4858 4140 4827 4757 5400 4279 4931 h.b. (tk.) 4,383 5,698 14,294 6,545 box 3: notice box for the table 3 source of table 3: shahidur r. khandker (1998) has calculated from his own estimates (joint significance of various credit variables on socioeconomic outcomes) assuming that the same marginal return applies for different durations. the acronyms & abbreviations we have used in table 3 are as follows : e.p.= extreme poverty m.p.=moderate poverty, a. prg. = after program b. prg. = before program. h.b. = household borrowing h.n.w.= household net worth tk. = taka p. c. y. con.= per capita yearly consumption the calculation of the two measures of povertymoderate and extremeare based on per person expenditure for participants before and after program participation (see table 3). about 83 percent of grameen bank participants were moderately poor and 33 percent were extremely poor before joining grameen bank. after participating in grameen bank only 62 percent were moderately poor and only 10 percent were extremely poor. thus about 21 socioeconomic impacts of microfinance programs in the development of bangladesh rezaul karim 12 percent of grameen bank borrowers managed to lift their families out of poverty within 4.2 years of membership. this means that 5 percent of grameen bank households rose above poverty each year by borrowing from grameen bank. similarly, 3 percent of brac households and 6 percent of rd-12 households rose from poverty each year. poverty reduction was thus highest for rd-12, followed by grameen bank and brac, although inter-program differences were not statistically significant. gains were smallest for rd-12 members who had participated in the program for more than 5 years. however, borrowers who recently joined a micro credit program were poorer than their predecessors, and the gains in poverty reduction were higher among grameen and brac participants with at least 5 years of program experience than among those who recently joined either program. this result suggests that program participation impacts on poverty reduction are likely to be sustainable with micro credit programs. net worth increased for all programs regardless of participation duration. however, only for grameen bank did it increase monotonically as participation duration increased. impact of microfinance programs at the national level means a lot, since poverty in bangladesh mainly a matter of challenge for the country, where a large number of the population do not have enough food to eat. microfinance program is such a weapon that attacks poverty at its sources by increasing the households‟ consumption expenditure of participants. the survey analysis describes at the national level that; borrowing from a program is estimated to reduce moderate poverty among participants by as much as 20 percent and extreme poverty by as much as 22 percent. this means that as much as 5 percent of program participating households should be able to lift their families out of poverty every year by borrowing from a micro credit program. what does this 5 percent annual poverty reduction for program participants mean at the national level? about half of the poor people in bangladesh are eligible to participate in micro credit programs. of those eligible about 45 percent participate. this means that micro credit programs effectively benefit only 20 percent of the population, and about 1 percent of the population (5% * 45% * 50%) can lift itself from poverty each year through such programs (assuming that the number of poor is fixed). but in reality, poor people are growing in bangladesh rapidly given annual population growth of 1.8 percent per year, which means the total number of poor people in the country will increase in spite of reductions in poverty brought about by micro credit. microcredit programs also seem to attack poverty on the social front. they empower women and thereby increase their role in household resource allocation, results a direct effect of increasing the welfare of children. concerning microfinance programs direct effect on children welfare, i bring one empirical study conducted by ruhul amin &yiping li (1997) on “ngo-promoted women‟s credit programs, immunization coverage, and child mortality in bangladesh”. their sample of 3564 targeted poor households covered by five ngos (asa, rdrs, dci, cda, and verc) in rural bangladesh. from their study findings it was revealed that, the ngo (collateral free) credit members as well as those who reside in the ngo program area were higher adopters of child immunization than those in the non-program area. similarly their study found that infant and child mortality was lower among the ngo credit members than among the non-members and that under five year deaths of children progressively decline with the increase in the doses of vaccines. based on this study finding, in general we can say that the microfinance programs have positive effects on children welfare. 6.8 achievements of microfinance in bangladesh 6.8.1 achievements of microfinance in bangladesh – the numbers  more than 1500 mfis are currently operating, with another many soon to join;  90% are clients of 4 big mfis. most mfis consistently report repayment rates of 98%+.  microfinance reaches „significant population of otherwise disadvantaged people‟(low/unstable incomes, little/no land/assets, low social status, few/no alternative sources of financial services): socioeconomic impacts of microfinance programs in the development of bangladesh rezaul karim 13  20+ million active clients ( 86% women)  (under)estimate: 15% are members of more than one mfi  (over)estimate: 75% of clients are poor  between 10 and 14 million poor households have access to microfinance 6.8.2 achievements of microfinance in bangladesh – economic and social effects  evidence is mixed, but on balance suggests „tangible enhancement of their capabilities‟, through asset enhancement and positive effects on socio-economic environment:  on average, positive economic effect on clients (e.g. building non-land assets, consumption smoothing), though effects are often small, and all may not benefit equally  on average, microfinance and associated mfi activity have had positive social effects(e.g. „women‟s empowerment‟; education; health; fertility)  studies suggest significant village-level spill over effects 6.8.3 achievements of microfinance in bangladesh – national level effects  national pride bangladesh now renowned for „invention‟ of microfinance; commitment and insight of yunus; vast cadre of competent, honest field staff … not just poverty, floods etc.; now exports model of microfinance globally(including „developed‟ countries).  employment creation at least 50,000 credit officer-type positions across the country whose households derive their livelihood from provision of microfinance.  next generation of social entrepreneurs – microfinance is turning people into social entrepreneurs in different levels especially for new generation. 7. findings of the research  micro credit contributed to smoothening consumption and reducing vulnerability.  wages in grameen villages and self-employment in off-farm activities increases.  microfinance programs have positive effects on children welfare.  about 68% of grameen borrowers‟ families have crossed the poverty line, the remaining are moving steadily towards the poverty line.  about 5 percent of grameen bank households, 3 percent of brac households and 6 percent of rd-12 households rose above poverty each year by borrowing.  positive impact on children's schooling: a 1.5% increase in grameen bank female borrowers increases the probability of school enroll 2.5% for boys.  marginal propensity to consumption increased (18% for women; 11% for male borrowers).  about 5.5% of grameen bank and 2.99% of brac households rose to poverty level.  household income increase by 31% and 35% for grameen bank and brac borrowers respectively.  10% increase in brac credit increased household net worth by 0.09% and 0.14% for female borrowers. 8. recommendation of the research  ensuring participation in microcredit program: impacts of microcredit program participation in order to poverty reduction are likely to be sustainable with micro credit programs. net worth increased for all programs regardless of participation duration. impact of microfinance programs at the national level means a lot, since poverty in bangladesh mainly a matter of challenge for the country, where a large number of the population do not have enough food to eat. microfinance program is such a weapon that attacks poverty at its sources by increasing the households‟ consumption expenditure of participants. socioeconomic impacts of microfinance programs in the development of bangladesh rezaul karim 14  selecting target group: both men and women should be targeted equally especially in family planning programs in order to obtain maximum impact from microfinance.  creating environment to invest remittances in capital market: since remittances play a significant role for the balance of payment as well as economic development of the country, the government can make easy access to the capital market for the remittance recipient families. moreover, bangladesh is role model and considered as pioneer in microfinance. many microfinance institutes (mfis) and non-government organizations (ngos) are operating in bangladesh. but still this remittance sector is untapped by them. although at present there is a provision for quota of foreign investors or nonresident bangladeshis‟ during initial public offering (ipo) of issuing shares, but this process is so critical that most of the time this quota doesn‟t fulfilled. the government should make this quota system of issuing ipo also applicable for the families of the non-resident bangladeshis, so that they can invest in the capital market.  utilization of remittances in productive investment: the government as well as private sectors specially the mfis/ngos can come forward in this regard. at present one ngo is playing role of transferring remittances. but the mfis/ngos need to do more beyond transfer. the government should eliminate regulatory constraint of transferring remittance for mfis/ngos. the government as well as mfis/ngos can provide business development services to the remittances recipient families to start and operate an enterprise. if the government makes the regulation flexible regarding savings and credit products of mfis/ngos, then the mfis/ngos can develop appropriate savings, credit and insurance products for remittance recipient families. the government can also establish investment company to channel more capital through mfis/ngos to the remittance recipient families which are operating enterprise.  develop new foreign policy: the government should develop new foreign policy and assigned a professional person at each diplomatic mission office abroad to explore the potentials of manpower export in that country and properly lobby with different concerned persons of that country. at present although the government has a post of labor attaché in diplomatic mission of some countries, but still it is insignificant. 9. conclusion microfinance service provides credit to the poor without collateral. yunus‟s grameen model is one of the best ways to transfer the microfinance services into a social mechanism system which ultimately streamline the poor people into the socioeconomic development of the country and which are the reflections of today‟s bangladesh in the world. microfinance services help the poor people not only to survive but also make them productive, self-employed. microfinance service has much contribution to bangladesh‟s key economic development indicators, because it helps to increase gdp, gnp, savings, etc. penniless people who did not have any collateral are becoming self-employed by getting microfinance services. microfinance reduces poverty by increasing per capita consumption among program participants and their families. as a result, the poor are coming above the poverty line and eventually help to increase the gdp, savings, etc. accordingly. microfinance plays a very important role for rural women‟s empowerment perspectives, because women have clearly benefited by getting access to the credit; they are able to increase their income generating activities, become owner of non-land assets, etc. as a result these influence their children‟s consumption, schooling and thus independent effect on household resource allocation. so, the vision of microfinance in bangladesh is explicit, that is; not only alleviate the poverty but also play as a vital socioeconomic development mechanism. through socioeconomic impacts of microfinance programs in the development of bangladesh rezaul karim 15 the microfinance program participation, the poor can be covered by savings mobilization and sustainable credit market. it is such an instrument which is capable to eradicate the poverty from the below and eventually it helps to maintain a peaceful society. references chowdhury mr, mosley p, simanowitz a. (2004).the social impact of microfinance. journal of international development,16, 291-300. chowdhury, a. & abbas bhuiya, (2002).the wider impacts of brac poverty alleviation programme, impact programme document,15, 13-14. carney, d.(1998).sustainable rural livelihoods: what contribution can we make? london: department for international development. dichter, t.w. (1999). ngos in microinance: past, present and the future. in breth, s.a. (ed.) microinance in africa., sasakawa africa association, mexico city. hossain, mahabub and binayek sen.(1992). rural poverty in bangladesh: trends and determinants. asian development review ,10(1),1-34. hulme, d., & mosley, p. (1997). finance for the poor or poorest? financial innovation, poverty and vulnerability. dhaka: the university press. kabeer, n. (2003). assessing the “wider” social impacts of microinance services: concepts, methods, findings. ids bulletin, 34(4), 106114. khandker, shahidur r.(1998). fighting poverty with microcredit: experience in bangladesh. new york: oxford university press. ledgerwood, j. (1999). microfinance handbook. sustainable banking with the poor. an institutional and financial perspective, the world bank, washington d.c. littleield, e., murduch, j. and hashemi, s. (2003). is microfinance an effective strategy to reach the millennium development goals, cgap, focus note 24. littlefield & rosenberg.(1996).the role of rural credit projects in reaching the poor: ifads experience. in ilo (ed) group based savings and credit of the rural poor, geneva. morduch, j., & haley, b. (2002). analysis of the effects of microfinance on poverty reduction. new york: nyu wagner working papers series. navajas, s., schreiner, m., gonzalez-vega, c. and rodriguez-meza, j. (2000). microcredit and the poorest of the poor: theory and evidence from bolivia. world development, 28(2), 333-346. otero, m. (1999). bringing development back into microfinance. journal of microfinance, 1(1), 8-19. robinson, marguerite. (2001). the microfinance revolution: sustainable finance for the poor. washington, dc: the world bank, 304. robinson, m. s. (2001). the microfinance revolution: sustainable finance for the poor. washington d.c.: the world bank. rogaly, b. (1996). micro-finance evangelism, destitute women, and the hard selling of a new anti poverty formula. development in practice,6(2),100-112. schreiner, m. and colombet, h.h. (2001) from urban to rural: lessons for microfinance from argentina. development policy review. 19(3), 339-354. shahidur r. khandker .(1998). the impact of group-based credit programs on poor households in bangladesh: does the gender of participants matter?. journal of political economy, 106 , 958-96. simanowits, w& brody, f .(2004). „international finance corporation.emerging stock markets‟ fact book, socioeconomic impacts of microfinance programs in the development of bangladesh rezaul karim 16 washington dc. sinha, s.(1998). microcredit: introduction and review. ids bulletin,29(4),1–9. uncdf .(2004). basic facts about microfinance, [online]. available from [23rd august 2004]. wright, g. (2000). microfinance systems: designing quality financial services for the poor. london/dhaka: zed books/university press. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. copyright © cc-by-nc 2019, cribfb | afbr asian finance & banking review; vol. 3, no. 1; 2019 issn 2576-1161 e-issn 2576-1188 research article published by centre for research on islamic banking & finance and business, usa 12 cost of capital and optimal financing of corporate growth of selected manufacturing firms listed on the floor of nigerian stock exchange achebelema damiebi sam department of banking and finance rivers state university, port harcourt rivers state, nigeria abstract this dissertation empirically investigated the relationship between cost of capital and optimal financing of corporate growth of selected manufacturing firms listed on the floor of nigerian stock exchange. annual time series data were generated from the annual reports of the quoted firms and stock exchange fact book. fifty manufacturing firms were selected from the population of quoted manufacturing firms. four multiple regression models were specified and estimated with the aid of software package for social services (spss). equity financing measured as equity capital to total capital, debt financing measured as debt capital to total capital and return on investment were modeled as the function of cost of debt, cost of equity and weighted average cost of capital. the generated collinearity diagnostics result shows that the eigen values that correspond to the highest condition index and variable constant are less than 0.5 rule of thumb. the durbin watson test shows absence of auto-correlation. the regression coefficient shows that cost of debt and cost of equity have negative relationship on equity financing while weighted average cost of capital have negative effect, cost of debt and weighted average cost of capital have positive relationship with debt financing while cost of equity have negative effect on the dependent variable. cost of debt and reweighted average cost of capital have positive effect on return on investment while cost of equity has negative effect. model four found that cost of capital have positive relationship with financing mix of the quoted firms. from the model summary, the study conclude that cost of capital have no significant effect on equity financing and return on investment but significantly affect debt financing. it therefore recommends that management should formulate internal policy that will enhance the realization of optimal capital structure of the firms, formulating capital structure of the firm should be well examined with the investment policy of the firms, the environmental factors should be acknowledged in formulating cost of capital to avoid risk associated with inadequate or wrong capital structure, external source of capital such as debt should be properly appraised and integrated with the investment policy and cost of equity should be integrated with the objective of maximizing shareholders’ wealth through investment policies. keywords: cost of capital, optimal financing, of corporate growth, manufacturing firms, nigerian stock exchange. 1. introduction the finance management function is a critical success factor and determines the growth, profitability and survival of firms. these functions include the dividend and the financing decision. while the dividend decision determines the proportion of earnings to be distributed to shareholders and proportion to retain, the financing decision determine the optimal combination of debt and equity to maximize shareholders wealth. the two main sources of capital are the equity and debt which both needs to be remunerated at their own lost of capital. the cost of equity can be defined as the return expected on a firm’s common stock in the capital market. it represents the composition demanded by shareholders for providing capital and assuming the risk of waiting for this return. this implies that cost of equity reflects the opportunity cost of investigating in a firm’s stock as opposed to potential investments with similar risks (tushaj, 2010). cost of debt refers to cost of external source of fund such as cost of long term debt and cost of short term borrowings. scholars, business executives and government decision-makers all widely acknowledge the importance of corporate financing on the growth of the firm and the economy at large. financing decisions involve the selection of a capital structure that would minimize the cost of capital of the firm. apart from the investment and financing decisions, managers need to decide on the optimal combination of equity and debt for financing corporate growth. however, copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 13 the challenge is determining the optimal combination of equity and debt that reduces the cost of capital for financing corporate growth. the relationship between capital structure and the growth of corporate firms has been a point of departure amongst scholars in the field of finance. as oppose to the relevance theory, of gordon 1958, miller and modigliani known as the mm hypothesis opined that capital structure is irrelevant given some sets of assumption. this debate has deepened in modern empirical findings as many are in view of gordon while few support the mm hypothesis. this is because the assumptions of miller and modigliani are seen not to exist in real world but in an abstract world (maina & kondongo, 2013), (kaunbuthu, 2011), (abor, 2005), (ongore, 2011). for instance capm has been criticize that it is based on many unrealistic simplifying assumptions (fama & french 2004, young & saade 2011, berkman 2013) example all the behave rationally according to their utility function that they have homogeneous expectations and that funds can be borrowed or cent at the same interest rate. this is frequently used in settings such as estimation of equity risk premiums, firm valuation and capital budgeting, and investment management practices such as portfolio allocation, performance evaluation, active risk management and attribution analysis (hou et al. 2012; câmara et al. 2009). therefore, the cost of capital needs to be given attention in relationship to optimal financing of corporate growth. furthermore, an important condition for corporations to grow is that they have access to capital for investment in tangible as well as intangible assets. this requires first of all that capital markets are fit for purpose. that actors and institutions in capital markets, such as banks, investment funds and stock markets, have the incentives to properly integrate the internal objective of optimizing cost of capital. an examination in the nigerian capital market which is supposed to be an avenue for sourcing of long-term funds to finance long-term project is not developed as her foreign counterpart. it has therefore not been able to judiciously perform its primary obligation of meeting long-term capital needs of the deficits sectors through efficient accumulation of capital or mobilization of fund from the surplus units of the economy and effectively channel mobilized funds for economic use (ojo, 2012) for instance the nigeria capital market is very illiquid, few listed companies with low volume of equity transaction with low market capitalization which led to the increasing cost of equity capital. however, the financial sector reforms such as the bank consolidation and recapitalization also aim at making available easy source of debt financing to investors. a critical examination of the function of the institution prove that this objective is yet to be determined in relationship with cost of capital and financing corporate growth. despite the growing literature, the relationship between cost of capital and optimal financing of corporate growth remain a knowledge gap as existing studies focused on cost of capital and corporate profitability of listed firms. given the above problems, the controversies surrounding the impact of capital structure on corporate performance and the knowledge gap, this study seek to examine the existing relationship between optimal cost of capital and financing of corporate growth among quoted firms in nigerian stock exchange. 2. literature review 2.1 cost of capital a firm raises funds from various sources, which are called the components of capital. different sources of fund or the components of capital have different costs. for example, the cost of raising funds through issuing equity shares is different from that of raising funds through issuing preference shares. the cost of each source is the specific cost of that source, the average of which gives the overall cost for acquiring capital. the firm invests the funds in various assets. so it should earn returns that are higher than the cost of raising the funds. in this sense the minimum return a firm earns must be equal to the cost of raising the fund. so the cost of capital may be viewed from two viewpoints acquisition of funds and application of funds. from the viewpoint of acquisition of funds, it is the borrowing rate that a firm will try to minimize. on the other hand from the viewpoint of application of funds, it is the required rate of return that a firm tries to achieve. the cost of capital is the average rate of return required by the investors who provide long-term funds. in other words, cost of capital refers to the minimum rate of return a firm must earn on its investment so that the market value of company’s equity shareholders does not fall. 2.1.1 estimating the cost of equity capital estimating the cost of equity involves estimating the expected return on a firm’s common stock. the cost of equity includes a risk premium to compensate shareholders for holding a risky equity security rather than a risk-free security: coei = e(ri) = rf + rpi (1) where coei = firm i’s cost of equity, e(ri) = the expected future return on firm i’s equity, where returns include capital gains and dividends, rf = the risk-free rate, and copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 14 rpi = the equity risk premium for holding firm i’s stock. there are two general approaches for estimating the cost of equity at a firm level. we use an implied approach which measures the cost of equity as the internal rate of return that equates the present value of forecasted future cash flows to equity holders with the current stock price. in comparison, the realized returns approach uses information in realized ex-post stock returns to generate a cost of equity. in this section we discuss the different implied cost of equity models and explain our choice of the implied approach over the realized returns approach. 2.2 implied approach determining the cost of equity using the implied approach is analogous to determining the nominal yield to maturity on a bond; i.e., finding the discount rate that sets the bond’s price equal to the present value of future cash flows. similarly, the implied cost of equity is the discount rate that sets the current stock price equal to the present value of expected future dividends per share. the relation between the current stock price (p0), the cost of equity (r), and future expected dividends per share (d1, d2, d3 …) is represented by the dividend discount model (ddm). 3 3 2 21 )1()1()1( r d r d r d po       (2) in practice, determining a bond’s nominal yield to maturity is easier, since future coupon and principal payments are known. finding the implied cost of equity is much more difficult since future dividends must be forecasted into infinity. the various implied models differ in terms of how this stream of dividends evolves. 2.3 gordon dividend growth model the simplest form of the ddm, the gordon dividend growth model, assumes a constant perpetual rate of growth (g) in expected dividends per share. with this assumption, dividends are an infinite geometric series, and the cost of equity can be written as a function of the dividend yield plus the constant growth rate: g p d r o  1 (3) two problems are encountered when estimating the cost of equity using the gordon dividend growth model. first, it is difficult to estimate a long-term growth rate as typically only shorter-term forecasts are available. in practice, many use the five-year dividend growth rate as a proxy for the long-term rate. second, in the gordon model it is possible to specify that dividends grow at a rate that is greater than economic growth, which implies that dividends will be larger than the economy at some future point. we do not use the gordon growth model in our analysis, but discuss it here to provide a simple intuition as to how growth and dividend assumptions impact the cost of equity. 2.4 residual income valuation models residual income valuation (riv) models address the difficulties in estimating a long term growth rate by utilizing accounting information. these models equate the current share price to the sum of two components: (1) the present value of expected dividends per share over a short or medium-term horizon (n); and (2) a discounted terminal value, which is the present value of the expected share price at the end of the forecast period, assuming that dividends then grow at a constant rate (gl) in perpetuity: n n n t t t o rglr d r d p )1)(()1( 1 1        (4) riv models assume clean surplus accounting which requires that earnings are fully allocated between dividends and retained earnings; i.e., whatever portion of earnings that is not paid out in dividends is added to book value of equity. hence, book value per share (bvt) evolves according to the following equation: 111   tttt debvbv (5) and as roet = return on book equity = et / bvt-1 then bvt+1 )1(1( 1 1 1     t t tt e d roebv (6) assuming that return on book equity and the dividend payout ratio after time n+1 remain constant, the following constraint is imposed on the long-term growth rate of dividends per share (gl) in equation (4) copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 15 )1( 1 1 1     n n nl e d roeg (7) claus and thomas (2001) implement the riv model using a four-year forecasting horizon (n=4) and set the growth rate (gl) equal to the expected inflation rate (pe) in order to calculate a nominal cost of equity.8 dividends per share in year five are backed out from equation (6) as follows: 55 1()1( roe es roe g ed el ss   (8) so the cost of equity in the claus and thomas model is the value of r that solves the following equation: 4 5 4 1 )1)(()1( rr d r d p et t t o        (9) if dividends are all positive and the cost of equity is greater than the expected inflation rate, there is only one value of r that will solve this equation. 2.5 abnormal earnings growth models another class of implied models assumes that the change in abnormal earnings from year to year grows at a constant rate into perpetuity. this is similar to assuming that the forecasted change in dividends grows at a constant rate, if the change in dividends is calculated as: )()( 111212 degeedd l  (10) in the ohlson and juettner-nauroth (2003) version, a closed form solution for the cost of equity can be backed out from the following relation between price, next year’s earnings per share estimate and next year’s expected dividends per share: )( )(11 l ls l o grr gge gr d p      (11) where gs = short-term dividends per share growth rate = (e2e1)/e1 gl = a long-term dividends per share growth rate gode and mohanram (2003) implement this theoretical model of ohlson and juetnner-nauroth by assuming that the short-term growth rate (gs) is equal to the average of the forecasted growth rate between year one and year two and the average five-year growth rate provided by analysts. furthermore, they assume that the long-term growth rate (gl) is equal to expected inflation for all firms. easton’s (2003) model, called the modified-peg ratio model,10 is just a special case of the ohlson and juettnernauroth model, where the growth rate in the change in dividends is set equal to zero (gl = 0) so that dividends grow by the same dollar amount every year into perpetuity. the current stock price is related to the cost of equity, the next two year’s forecasted earnings, as well as the next year’s dividend: 2 1 1 r ge r d p s o  (12) the advantage of the easton and ohlson-juettner-nauroth models over riv models is that they yield simple formulas for the cost of equity. riv models have more terms because they explicitly forecast variables over the short-term before calculating a terminal value. in contrast, the abnormal earnings growth models make assumptions so that the terminal value is calculated immediately, which allows them to be easily inverted to solve for the cost of equity. 2.6 hedging and the cost of capital corporate finance theory formulates that firm value is the present value of future cash flows. therefore, the impacts of hedging on firm value can be from: the effect on the cash flow stream and/or the impact on the cost of capital by which future cash flows are discounted. easley and o’hara (2004) highlight that the cost of capital is fundamental in corporate policies because of its impact on profitability, and hence investment decisions. recent studies suggest that hedging has notable influences on the cost of equity. for example, gay, lin, and smith (2010) report that hedging copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 16 affects the cost of equity through a reduction in the covariance of future cash flows. in particular, the cost of equity is reduced when hedging lowers the effective discount factor of future investment payoffs. they document that the cost of equity for hedging firms is 24 to 78 bps lower than those firms that do not hedge. 2.7 reduced bankruptcy cost the probability of bankruptcy or financial distress is considerably higher when a firm’s earnings or cash flows are more volatile. because hedging smoothes corporate income or cash flows, bankruptcy risk is reduced. in particular, smith and stulz (1985) suggest that hedging reduces a firm’s cash flow volatility and consequently lowers the expected cost of financial distress. as a result, we conjecture that hedging should lead to a lower cost of debt. in addition, highly leveraged firms often cannot afford a large debt capacity since the cost of debt is high. graham and rogers (2002) find that hedging helps increase debt capacity, leading to an average increase of 1.1% in firm value. 2.8 lower agency cost of debt myers (1977) suggests that firms with risky debt may forgo positive npv projects if some or all of the value of the project goes toward the bondholders when poor states occur. hedging alleviates the underinvestment problem by reducing the probability of the poor states occurring. therefore, shareholders have greater incentives to invest in value-enhancing projects (bessembinder (1991). froot, scharfstein, and stein (1993) theorize that hedging curtails the underinvestment problem when a firm faces growth opportunities and a high cost of external financing. in this case, hedging leads to managers following the optimal investment policy by generating sufficient internal funds and having a low cost of capital. second, hedging mitigates the risk-shifting problem (campbell and kracaw, 1990). 2.9 lower level of information asymmetry literature indicates that managers have better information about firm performance than outsiders. as the release of information is costly and managers may have incentives to distort or not fully disclose information for private benefits, investors do not have full information on asset values or their information set is noisy. as a result, information asymmetry affects equilibrium asset prices and expected rates of return by influencing the investors’ assessments regarding the distribution of future cash flows. easley and o’hara (2004) demonstrate that investors demand a higher return on stocks with more private information. duffie and lando (2001) argue that information content and quality based on accounting disclosure are critical for bondholders to retrieve a conditional distribution of an issuer’s asset value. 2.10 empirical review khaled and samer (2014) examined the determinants of the rate of return on investment in stocks and the application of it on industrial enterprises, contributed to the ase, which consists of 91 industrial companies during the study period from 19972009. the study used multiple linear regression analysis. the model included a number of independent variables which are the cost of capital, financial leverage, and growth rate of dividends. the results of the study showed that there is appositive effect and statistically significant for growth rate of dividends on rate of return on investment (dependent variable). on the other hand, the study showed no effect with statistical significance for each of the cost of capital and financial leverage on rate of return on investment (dependent variable). it turns out that the effect of the growth rate of dividends on the rate of return on investment is not compatible with the hypotheses of the study, while that the effect of each of cost of capital and financial leverage on rate of return on investment in the stock, consistent with the hypothesis of the study. casmir and anthony (2012) found that a capital structure of a firm has a negative impact on firm’s performance. they proved that highly leverage capital structure caused negative impact on firm’s performance but it also provides tax rebate on interest expenses. they used different variables to obtain results such as return on assets, return on equity, debt to equity ratio, assets turnover ratio, firm’s size and age, asset tangibility, growth and industrial sector. they used ordinary least square (ols) model of estimation. they proved that roa, roe and asset turnover are important measure of firm’s financial performance. they also concluded that tangibility of assets have great impact on firm’s performance. they concluded that the firms of their sample size are not utilizing their tangible assets up to their maximum capacity. so, assets tangibility is also a vital measure of firm’s performance. they could not prove the result of industry growth. ahmad, abdullah and roslan (2012) proved that capital structure decision has a vital importance. a wrong decision may cause a negative impact so; great care is required. there are different theories of capital structure such as modigliani miller theorem, pecking order theory, static trade off theory and agency cost theory. pecking order theory focuses on the use of an organization’s internal funds. they used return on assets, return on equity with short term and long term debt and total debt, size, asset growth, firm growth and efficiency. they used series of regression analysis to measure the desired results. they studied pecking order theory, modigliani miller theorem and static trade off theory to understand the relationship between capital structure and firm’s performance. the study found that short and long term debts with roa and roe and total debt of capital structure has great impact on firm’s performance. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 17 chowdhury and paul (2010) found that a company injects capital to generate revenue. if capital of a company is 100% equity than all the earnings after tax goes to shareholders if capital structure consists debt than a part of profit is also given to creditors as a rent of their funds’ use. according to financial experts use of debt up to specific point is profitable otherwise it is harmful. they used different variables as; share price, firm size, profitability, public european journal of business and management ownership in capital structure, dividend payout, asset and operating efficiency, growth rate, liquidity and business risk. they used cross sectional times series regression model to measure the relationship of all these variables. on the basis of their analysis they concluded that if capital structure of a firm is designed in a good manner it multiplies the value of firm. they also proved that if a firm makes amendments in its capital structures it also causes a positive impact on its value. umar, tanveer, aslam and sajid (2012) proved that capital structure has a vivid impact on firm’s financial performance. it is a way through which a firm is financed. they used different variables of financial measure such as return on asset, return on equity, earning per share, price earnings ratio, earnings before interest and tax and net profit margin. p-eriotis, frangouli and ventoura (2011) noted that firms financed with equity are more profitable as compare to those financed by debt. if debt amount is high than a part of its profits is given as interest which ultimately reduces its profits. so, capital structure choice has vital importance. debt to equity ratio is used in order to examine its impact on firm’s profitability. fix effect model and random effect model are used. it is analyzed that debt negatively impacts a firm’s profitability because mostly the cost of debt is high than profits of the firm. they also concluded that firms liked to compete with one and another rather than cooperating. imran (2012) investigated a relationship between a firm’s performances, equity ownership and capital structure. many organizations use debt as a controlling measure. the external parties keep check and balance on management’s decision making and generate better results. debt to equity ratio to measure leverage (capital structure). regression model is used to calculate desired outcomes. the results of this study showed that organizations with high leveraged showed more profit of those firm which use their extra cash and reduce it from management. family ownership has a positive relationship with performance. adeyemi and oboh (2011) studied a sample size of 66 companies quoted in the nigerian stock exchange and found that a significant relationship between capital structure and the performance of quoted firms in nigeria using primary data from questionnaire. nosa and ose (2010) used growth opportunity, non debt task shield, tangibility, profitability and earning volatility also found positive and significant relationship with the dependent variable which is corporate performance. nicholas et al, (2013) examined accounting information and cost of capital: a theoretical approach. the primary goal of the study is to provide a theoretical model that shows explicit solutions for equilibrium prices and derives the equilibrium required return for the firm’s stock price. in other words, this theoretical study provides a direct link between accounting information, related to the firm’s reports, and the cost of capital within an equilibrium setting. accounting information is judged to be of high value because it affects the market’s ability to direct firms’ capital allocation choices. the findings showed that an increase in expected cash flows, coming from improvements in the quality of accounting information, leads to a reduction in the firm’s cost of capital. 3. research methods this study used secondary data which was handpicked from the annual report and statement of account of selected quoted firms on the nigerian stock exchange for the period. 3.1 model specification summary statistics for the variables was calculated. the analysis utilized time series data with generalized least squares regression. the most basic test involved regressing the dependent variable, equity financing, debt financing and corporate growth proxy by profitability of the quoted firms against the four independent variables which are cost of equity, cost of debt, cost of preference share and weighted average cost of capital. thus, in line with the objectives of the study, the following models are formulated: model i eqf = f(cdc, ceqc, wacc) (1) eqf = α0 + β1cdc + β2ceqc + β3wacc + i (2) model ii df = f(cdc, ceqc, wacc) (3) df = α0 + β1cdc + β2ceqc + β3wacc + i (4) model iii roi = f(cdc, ceqc, wacc) (5) copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 18 roi = α0 + β1cdc + β2ceqc + β3wacc + i (6) model iv fm = f(cdc, ceqc, wacc) (6) fm = α0 + β1cdc + β2ceqc + β3wacc + i (7) where: eqf = equity financing df = debt financing roi = return on investment fm = financing mix proxy by debt equity ratio cdc = cost of debt capital ceqc = cost of equity capital wacc = weighted average cost of capital α = regression constant β1 – β3 = regression coefficient i = error term 4. techniques of analysis the models stated will be analyzed using the multiple regression models. the statistical package for social science (spss) will be used to examine the relationship between the dependent and the independent variables as formulated in the models. the idea behind regression analysis is the statistical dependence of one variable, the dependent variable, on one or more variables, the independent or explanatory variables. the objectives of such analysis are to estimate or predict the mean or average value of the dependent variable on the basis of the known or fixed values of the explanatory variables (gujarati and porter, 2009). 5. presentation and analyses of results table 1: tolerance and variance inflation factor (vif) model i tolerance vif cdc .229 4.369 cec .294 3.399 wacc .280 3.574 source: spss print out 22.0 (2019) the variance inflation factor result shows that all the variables fall below 4.0 and 10.0 which is the minimum and the maximum variance inflation coefficient. from the above, the study conductively conclude that the variance inflation factor. table 2: colinearity diagnostic and durbin watson test model eigen value cond index constant variables proportion cdc ceq wacc 1 6.321 1.000 .00 .00 .00 .00 2 .418 3.890 .51 .11 .04 .00 3 .174 6.030 .01 .40 .95 .06 4 .057 10.497 .49 .49 .00 .00 durbin watson test 1.771 source: spss print out 22.0 (2019) the eigen value provides an indication of how many distinct dimensions they are among the independent variables, when several eigen value are close to 0, the variables are highly intercorrelated and the market is said to be unconditioned; which means small changes in data values will lead changes in the estimates of the coefficients. from the table above, the eigen values are greater than 0, this proves that the variables are not highly correlated, this means the absence of multicolinearity. a condition index greater than 15 indicates a possible problem and an index greater than 30 suggests a serious problem. from the table above, the condition index are less than 15 and 30 that copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 19 means the absence of serial autocorrelation among the variables. the durbin watson statistics for the models are greater than 1.00 but less than 2.00 which means the presence of positive autocorrelation among the variables. table 3: effect of cost of capital on equity financing variables cdc cec wacc unstandarized β -5.302 -17.776 762.808 standarized β -.208 .534 .758 standard error 13.836 15.927 493.540 partial correlation -.110 .307 .407 zero order -.016 -.115 -.169 t-statistics -.383 -1.116 1.546 t-significant .708 .286 .146 r2 .439 r2 .193 f-ratio .956 f-sig .445 source: extracts from spss window (22.0) 6. interpretation of regression results the regression result presented in the above table shows that cost of debt capital and cost of equity capital have negative relationship on equity financing, this means that the negative coefficient of 5.302cdc and 17.776cec would reduce equity financing by 5.3% and 17.7% for a unit increase in the independent variables while the positive coefficient of 762.808wacc will add to equity financing for a unit increase in weight average cost of capital. the models show that the independent variables can explain 19.3% variation on the dependent variable. the t-statistics and the t-significant shows that the models are statistically not significant. the correlation coefficient shows that the relationship between the dependent and the independent variable is proxy by 43.9%. the correlation coefficient of the independent variables confirms the relationship as reveal by the unstandardized and standardize β coefficient. the f-ratio found that the regression model is statistically not significant. table 5: effect of cost of capital on debt financing variables cdc cec wacc unstandarized β 1.865 -.843 17.463 standarized β .878 -.304 .208 standard error .733 .844 26.157 partial correlation .592 -.277 .189 zero order .801 .581 .703 t-statistics 2.543 -.999 .668 t-significant .026 .338 .517 r2 .820 r2 .673 f-ratio 8.227 f-sig .003 constant α0 708.880 st-statistics 2.022 sig. .668 source: extracts from spss window (22.0) 7. interpretation of regression results the regression result presented in the above table shows that cost of debt and weighted average cost of capital have positive effect on debt financing, this means that the negative coefficient of 1865cdc and 17.463wacc proved that an increase of 10% will lead to 18.6% increase and 17.4% in debt financing while the negative coefficient of .843cec will reduce debt financing by 8.4% for a unit increase in the variables cost of capital. the models show that the independent variables can explain 67.3% variation on the dependent variable. the t-statistics and the tsignificant shows that cdc is statistically significant while cec and wacc are statistically not significant. the correlation coefficient shows that the relationship between the dependent and the independent variable is proxy by 82% correlation coefficient of the independent variables confirms the relationship as reveal by the unstandardized and standardize β coefficient. the f-ratio found that the regression model is statistically significant. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 20 table 6: effect of cost of capital on return on investment variable cdc cec wacc unstandarized β .104 -.299 120.197 standarized β .008 -.018 .244 standard error 7.312 8.417 260.838 partial correlation .004 -.010 .132 zero order correlation .197 .179 .237 t-statistics .014 -.036 .461 t-significant .989 .972 .653 r2 .237 r2 .056 f-ratio .868 f-sig .868 constant α0 -1958.976 t-statistics -.560 significant .586 source: extracts from spss window (22.0) 8. interpretation of regression results the regression result presented in the above table shows that cost of debt and weighted average cost of capital have positive effect on debt financing, this means that the positive coefficient of .104cdc and 120.197wacc proved that an increase of 10% will lead to 0.4% increase and 120% in return on investment and weighted average cost of capital while the negative coefficient of .229cec will reduce return on investment by 2% for a unit increase in the variables cost of capital. the models show that the independent variables can explain 5% variation on the dependent variable. the t-statistics and the t-significant shows that all the independent variables are statistically not significant. the correlation coefficient shows that the relationship between the dependent and the independent variable is proxy by 23.7% correlation coefficient of the independent variables confirms the relationship as reveal by the unstandardized and standardize β coefficient. the f-ratio found that the regression model is statistically not significant. table 7: colinearity diagnostic and durbin watson test model eigen value cond index constant variables proportion cdc ceq wacc 1 3.998 1.000 .00 .00 .00 .00 2 .002 48.747 .51 .11 .04 .00 3 .000 90.351 .00 .40 .95 .06 4 .000 117.075 .49 .49 .00 .94 durbin watson test 1327 source: spss print out 22.0 (2019) the eigen value provides an indication of how many distinct dimensions they are among the independent variables, when several eigen value are close to 0, the variables are highly intercorrelated and the market is said to be unconditioned; which means small changes in data values will lead changes in the estimates of the coefficients. from the table above, the eigen values are greater than 0, this proves that the variables are not highly correlated, this means the absence of multicolinearity. a condition index greater than 15 indicates a possible problem and an index greater than 30 suggests a serious problem. from the table above, the condition index are less than 15 and 30 that means the absence of serial autocorrelation among the variables except weighted average cost of capital with the condition index of 117.075. the durbin watson statistics for the models are greater than 1.00 but less than 2.00 which means the presence of positive autocorrelation among the variables. table 8: effect of cost of capital on financing mix variables cdc cec wacc unstandarized β 1.201 3.832 46.058 standarized β .230 .563 224 standard error .911 1.049 32.497 partial correlation .356 .726 .379 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 21 zero order .880 .927 .854 t-statistics 1.318 3.654 1.417 t-significant .212 .003 .182 r2 .196 adj. r2 .895 f-ratio 43.705 f-sig .000 constant α0 -1420.280 t-statistics -3.261 significant .007 source: extracts from spss window (22.0) 9. interpretation of regression results analyses in the regression results presented in the above table indicates that cost of capital such as cost of debt, cost of equity and weighted average cost of capital of the selected firms have positive relationship with the financing mix of the firms. the positive coefficient of 1.201 as the regression parameter for cost of debt, 3.832 for cost of equity and 46.058 for weighted average cost of capital reveal that a unit increase on the independent variable will lead to significant increase such as 12.0%, 38.3% and 460.5% increase on the dependent variable. the r2 and the adjusted r2 reveal that 91.6% and 89.5% variation on the dependent variable can be traced to variation on cost of capital. the f-statistics and f-significant justifies that the model is adequate in predicting variation on the dependent variable. the findings of the model proved that increase in cost of capital increase the financial mix of the quoted firms. this is contrary to the expectation of the results but justifies the opinion of miller and modigliani as against the gordon. the positive relationship between the variables could be traceable to the inability of the firms to source alternate source of capital for investment but force to borrow or float equity without considering the cost. 10. discussion of findings the relationship between corporate capital structure and the performance of quoted firms has long been a point of controversy among scholars in corporate finance. unlike the dividend policy that determines the rate at which the management determines the proportion of its capital that will be distributed to shareholders and the proportion to be retain, capital structure determine the proportion of the company’s capital that is internally generated known as equity capital and the proportion that is borrowed outside the firm known as debt capital. optimal combination of the two components of capital determines the cost of capital and the financial structure of the corporate organization. higher cost of debt capital will results in formulating policies that will enhance internally generate capital such as higher retention ratio and lower dividend payout ratio or increasing the equity share capital through floatation of equities by rights issues or by public offer (pandey, 2005). this illustrates the trade-off theory as formulated by meyer. regression results from model i of this study found that cost of capital have no significant effect on equity financing of the selected manufacturing firms in the study as the explained variation reveals that the independent variables which are cost of debt, cost of equity and weighted average cost of capital can only explain 19.3% explained variation on the dependent variable. the β coefficient of the variables proved that cost of debt and cost of equity capital have negative relationship with equity financing while weighted average cost of capital have positive relationship. the negative effect of the variables confirms the apiriori expectation of the results as increase in cost of capital discourages investment according to economic theory. this means that increase in cost of capital will discourage investment of the selected manufacturing firms. the findings confirm the findings of lotfi (2004) on the negative effect of cost of capital on fixed assets of selected firms on the floor of kenya stock exchange. it also validates the findings of hussain et al., (2012) on the effect of cost of capital on corporate profitability of selected manufacturing firms in india. the positive effect of weighted average cost of capital can be traced to management factors and policies formulated to leverage the cost of capital and decreasing dividend payout ratio and increasing retention ratio. model ii was formulated to examine the relationship between cost of capital and debt financing. the regression result found that cost of debt and weighted average cost of capital have positive but insignificant relationship with debt financing. it reveals that an increase in cost of debt and weighted average cost of capital will enhance cost of debt financing. this finding is contrary to the expectation of the study as the variables are expected to have a negative effect on the dependent variable. the positive effect can be traced to opinion of oseigbu (2005) that found positive relationship between interest rate and bank lending and was blamed on the ineffectiveness of the financial sector and the inability of the corporate firms to formulate polices that will leverage the challenging effect of cost of capital within the business environment. however, cost of debt has positive and significant effect on debt financing. this finding confirms the findings of akani and lucky (2016) on the positive effect of capital structure and shareholders’ value of quoted commercial banks in nigeria. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 22 model iii was formulated to investigate the effect of cost of capital on the profitability of selected manufacturing companies and the regression results found that cost of debt and weighted average cost of capital have positive but insignificant effect while cost of equity have negative but insignificant effect. the results reveal that the independent variable can only explain 5% variation on the dependent variable; this shows that cost of capital is statistically not significant on the profitability of the selected manufacturing firms. theoretically, increase in cost of capital discourage investment and therefore the negative effect of the variable on profitability confirm the a-priori expectation of the results while the positive effect can be traced to the fact that corporate firms has no valid option on source of capital and are forced to obtain fund whether the cost is high or not. 11. conclusion and recommendation 11.1 conclusion this study investigated the relationship between cost of capital and financing of corporate growth of 50 selected manufacturing firms listed on the floor of nigerian stock exchange using time series data from 2000 – 2015. financing of corporate growth was proxy as equity capital to total capital, debt capital to total capital and return on investment while cost of capital was proxy by the traditional method as formulated by pandey (2005) as cost of debt, cost of equity and weighted average cost of capital. from the findings of the study, we draw the following conclusion:  that the relationship between cost of capital and equity financing is statistically not significant. cost of debt and cost of equity have negative and insignificant effect while weighted average cost of capital has positive but insignificant effect on the dependent variable. the model summary shows that the independent variables could only attest 19.3% variation while the f-statistics shows that the model is statistically not significant.  that cost of capital has significant relationship on debt financing as the model summary portray that the independent variables have a correlation coefficient of 82%, an r2 of 67.3% and the model is statistically significant. cost of equity capital has negative effect while cost of debt and weighted average cost of capital have negative effect.  that cost of capital has no significant effect on return on investment of the selected manufacturing companies as the multiple r shows 23.7%, r2 of 5.6% and the model tested not significant despite the positive effect of cost of debt and weighted average cost of capital. 11.2 recommendation  management should formulate internal policy that will enhance the realization of optimal capital structure of the firm which determines the combination of equity capital and debt capital as the capital structure of the firm and the business environment should be well diagnosed and tactical measures used to ensure that cost of capital does not affect the investment decision of the firms and the profitability.  formulating capital structure of the firm should be well examined with the investment policy of the firms to avoid high cost of capital that will not enhance investment financing of the firms and the environmental factors should be acknowledged in formulating cost of capital to avoid risk associated with inadequate or wrong capital structure of the firm to enhance profitability.  external source of capital such as debt should be properly appraised and integrated with the investment policy of the firms to leverage the high cost of debt and its effect on investment and profitability and cost of equity should be integrated with the objective of maximizing shareholders’ wealth through 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(2011). using the capital asset pricing model and arbitrage pricing theory in capital budgeting. in: baker hk, english p (eds) capital budgeting valuation. financial analysis for today’s investment projects. wiley, hoboken, nj, 363–380 copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). contents asian finance & banking review vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business the impact of international trade on economic growth in nigeria: an econometric analysis stephen egoro a. and obah daddy obah the impact of international trade on economic growth in nigeria: an econometric analysis stephen egoro a.1 obah daddy obah1 1department of finance and accountancy, niger delta university, bayelsa state, nigeria correspondence: department of finance and accountancy, niger delta university, bayelsa state, email: obahdaddy@gmail.com received: october 14, 2017, accepted: october 19, 2017, online published: october 26, 2017 abstract the study examines the effect of international trade on the economic growth of nigeria from 1981 to 2015. the model specified economic growth measured by gross domestic product as dependent on international trade proxy by non-oil imports, oil imports, non-oil exports, and oil exports. secondary data was adopted and sourced from cbn statistical bulletin. multiple regression estimation techniques with the aid of e-view version 9 was used to analyze the effects of international trade on the economic growth of nigeria. it was evidenced that international trade has a significant positive impact on economic growth in nigeria. the study recommends that government should reduce over-dependence on oil exports and increase and diversify its export base to earn more revenue. keywords: international trade, economic growth, gdp, non-oil import, oil import, non-oil export, oil export, analysis. 1. introduction the economic growth of any economy is a crucial issue because of it, ultimately, forms the crux of economic development which is the desire of every economy (todaro, 2010). the dividend of growth is what digests into the numerous strands of development indices that are enjoyed by the affected economy. it has, therefore, become the focus of every economy to harness every available resource towards enhancing sustainable growth. the external sector of the economy is one major aspect through which growth can be enhanced. this is so because of the economic interaction with other economies of the world, through trading, enhances the productivity of the economy. thus, the need for international trade as it relates to global and domestic economic growth and development. international trade leads to specialization, increase in resource productivity, large total output, a creation of employment, generation of income and relaxation of foreign exchange restraints (nnadozie, 2003). the positive relationship that exists between global trade and economic growth may be as a result of the likely positive externalities due to the involvement of different countries in the international trade. the role of international trade in promoting industrialization and economic development cannot be overemphasized. this is because foreign trade provides an impetus for industrial development by making inputs available for domestic production, particularly in developing economies including nigeria where production activities heavily depend on imported inputs. also, foreign trade enlarges market frontiers for domestic industrial output (exports), thus leading to increased investment, employment, output, and income. foreign trade expands production possibility frontiers and broadens the consumption baskets of the people in the participating countries and thereby improves their welfare (adewuyi & adeoye, 2008). international trade is simply known as the exchange of goods and services between nations of the world. at least two countries should be involved in the activities, that is, the aggregate of activities relating to trading between merchants across borders. traders engage in economic activities for the purpose of the profit maximization engendered from differentials among international economic environment of nations (adedeji, 2006). kehinde, jubril, felix & edun, (2012) asserts that trade can promote growth from the supply side, but if the balances of payment cost reduce the availability of imported inputs which enter the product of exports, thus forcing exporters to use expensive imports of double quality. international trade allows for the exchange of goods and services cum foster healthy relations among countries irrespective of their level of economic development. a country involved in international trade need not have fear of hegemony or loss of its sovereignty because it is a mutual agreement to engage in trade across their border. a nation not participating in international trade is at risk of a slow pace of economic development due to the cogent fact that a country cannot be fully endowed with all the resources essential to be utilized for sustainable economic development. the importance of international trade stems from the fact that no country can produce all goods and services which people require for their consumption largely owing to resources differences and constraints. as a result, this trade relationship suggests that economies need to export goods and services in order to generate revenue to finance imported goods and services which cannot be produced domestically. international trade can be interchangeably referred to as ‘foreign trade’ or ‘global trade’. it encompasses the inflow (import) and outflow (export) of goods and services in a country. a country's imports and exports represent a significant share of her gross domestic product (gdp); thus, international trade is correlated to economic growth. in an open economy, development of foreign trade greatly impacts gdp growth (li, chen & san, 2010). countries would be limited to goods and services produced within their territories without international trade. international trade is directly related to globalization because an increase in trade activities across the border is paramount to the globalization process. the globalized nature of an economy enhances its direct participation in the world market consequently leading to market expansion. according to adam smith, expansion of a country's market encourages productivity which inevitably leads to economic growth. government earns revenue through international trade activities. international trade, as a major factor of openness, has made an increasingly significant impact on economic growth (sun & heshmati, 2010). the openness of a nation influences a country's growth rate by impacting upon the level of economic activities and facilitating the transfer of resources across borders. nigeria is basically an open economy with international transactions constituting a significant proportion of her output (emeka, frederick & peter, 2012). nigeria's trade openness has increased the participation of foreigners in the economy by allowing the inflow of foreign capital and expertise, thereby impacting on her economic growth. however, the extent to which a country benefits from foreign trade is a function of a number of factors. among these factors is the trade policy regime operating in an economy. this could be protective or liberalized. nigeria as a country has experimented with a mix of the two trade policy regimes. at independence, nigeria embarked upon import substitution industrialization (isi) strategy as a means of promoting industrial transformation. the implementation of the isi necessitated the imposition of a high rate of tariff and non-tariff barriers to trade (oyejide, 1977; adewuyi and adeoye, 2008). trade policy in the post-independence period was largely import licensing and haphazard application of tariff via the annual budget. this engendered a serious anti-export bias which seemed to hinder growth and development of the nigerian economy (oyejide, 2001). since 1986 however, international trade policies have aimed at liberalization of the economy as well as achievement of greater openness and greater integration with the world economy. the policies thus ranged from abolition of marketing boards to introduction of the second tier foreign exchange market (sfem), various export expansion incentive schemes, the establishment of the nigeria export-import bank etc. liberalization of trade regime began with a partial dismantling of quantitative restrictions in 1986, which gave room for interim measures that led to a reduction of the number of items in the import prohibition list from 72 to 17 products categories (adewuyi & adeoye, 2008). thus, this implies selective import prohibitions and elimination of import licensing. coupled with this was a tariff reform which was instituted via the customs, excise and tariff consolidation decree 1988. this decree featured a new classification based on the harmonised system of tariff classification (hs chapters), which permitted direct international comparison of the country’s tariff lines and levels. it also featured a seven-year tariff regime so as to usher in stability and predictability. this reform was continued with decree no.4 of 1995, which specified tariff for another seven-year tariff regime spanning1995 to 2001. in a bid to expand her market access, nigeria has signed bilateral, regional and trade preferential agreements with different countries. for instance, nigeria is one of the founding members of economic community of west african states and of the world trade organization and a signatory to the lome convention (ogunkola & oyejide, 2001). despite these efforts, trade in nigeria has dwindled in the period of great liberalization. similarly, alongside with trade liberalization is financial liberalization policies which were implemented to foster competition among the domestic firms and between the domestic import-competing firms and foreign firms with a view to promoting efficiency. under trade liberalization policy, the levels of both tariff and non-tariff barriers were reduced and the commodity marketing boards were scrapped. despite these policy measures, the performance of the economy in terms of growth has been dismal. thus, it is in the light of this that the study intends to examine the impact of international trade on the economic growth of nigeria. economic growth is one of the main objectives of every society in the world and international trade is fundamental to economic growth. international trade is considered as one of the very important contributors among them. nevertheless, the overwhelming evidence of positive impact of international trade on economic growth cannot be overemphasized. however, there are some questions to ask: what relationship exists between nigeria’s involvement in international trade and her economic growth? moreso, the discovery of oil in commercial quantity in 1956 (englama, duke, ogunleye & ismail, 2010) in oloibiri in the present day river state (afaha and aiyelabola, 2012), nigeria has been an important player in the world affairs, economically and otherwise, particularly being the 12th largest producer of crude oil in the organization of petroleum exporting countries (opec) (opec annual statistics, 2014). unfortunately, these blessing by nature to nigerian didn't reflect in the overall welfare of the citizen made worse (soderborn and teal, 2001), by the collapse of world oil market as a result of the glut in 1981 and 2015 (muritala, et al, 2012; nbs, 2015). for example, crude oil price, which rose rapidly from $20.94 dollars per barrel in apart from oil, nigeria export mainly primary products and often relies almost exclusively on a limited number of commodities, such exports are characterized by lower prices than manufactured goods plus highly volatile markets. thus, nigeria is often on the wrong end of unbalanced trade environment that favors developed countries. nigeria with the abundant human and natural resources is paradoxically being regarded as one of the poorest countries in the world. hence, the need to design appropriate strategy by diversifying the economy through export promotion, stimulating foreign direct investment and exchange rate stability in order to boost the productivity of nigeria economy by raising the standard of living of the citizens (kehinde, akinde, adekunjo & femi, 2012). moreso, the debate on the relationship between international trade and economic growth has exhibited considerable interest in the field of development economics; several empirical studies have been conducted to assess the role of international trade on economic growth of developed countries from various aspects (see, kalaitzi (2013; ruba abu shihab & thikraiat soufan, 2015; kalaitzi, 2013; kim & lin, 2009; abu al-foul, 2006; abou-state, 2005; burridge & sinclair, 2002; seipati & itumeleng, 2014). the findings of these studies indicate that international trades have a statistically significant positive impact on economic growth. however, for developing countries like nigeria, the evidence is an inconsistency (see awujola, 2013; usman, 2011; adeleye, adeteye & adewuyi, 2015; oviemuno, 2003; samuel & chris, 2013). therefore, there is the need to fill the literature gap. 2. objectives of the research the general objective of the study is to examine the impact of international trade on economic growth in nigeria. but specifically, the study will intend to; i. to determine the impact of non-oil import trade on economic performance (gdp) in nigeria. ii. to determine the impact of oil import trade on economic performance (gdp) in nigeria. iii. to determine the impact of non-oil export trade on economic performance (gdp) in nigeria. iv. to determine the impact of oil export trade on economic performance (gdp) in nigeria. 3. research questions this research work shall be guided by the following research questions. a) how and in what direction has non-oil import trade been affecting the economic performance of nigeria as a proxy by gross domestic product (gdp)? b) how and in what direction has oil import trade been affecting the economic performance of nigeria as a proxy by gross domestic product (gdp)? c) is there any significant relationship between non-oil export trade and the economic performance of nigeria as a proxy by gross domestic product (gdp)? d) is there any significant relationship between oil export trade and the economic performance of nigeria as a proxy by gross domestic product (gdp)? 4. statement of hypotheses for the purpose of this research work, three hypotheses are proposed: a) h0: non-oil import trade has not made any significant impact on the economic growth as proxy by gdp in nigeria b) h0: oil import trade has not made any significant impact on the economic growth as proxy by gdp in nigeria c) h0: non-oil export trade has not made any significant impact on the economic growth as proxy by gdp in nigeria d) oil export trade has not made any significant impact on the economic growth as a proxy by gdp in nigeria. 5. significance of the research this study will be essential to policy maker to know more about the performance of international trade and economic growth. it will also assist in providing the frame work of where work has been done by earlier researchers. it will also provide a framework on which further research in international trade could be carried out. this study will also be an invaluable tool for students, researchers, research institutions and the general public that partake in international trade who wants to know more about the impact of international trade on economic growth of nigeria. 6. scope of the research the scope of the study will span 34 years, that is, (1981 – 2014). the empirical analysis shall focus on the impact of international trade on the country’s economic growth. the gross domestic product (gdp) shall be used as the indicator for economic growth. 7. literature review international trade is simply known as the exchange of goods and services between nations of the world. at least two countries should be involved in the activities, that is, the aggregate of activities relating to trading between merchants across borders. traders engage in economic activities for the purpose of the profit maximization engendered from differentials among international economic environment of nations (adedeji, 2006). foreign or international trade concerns the study of the causes and consequences of the international exchange of goods and services, and of the international movement of factors of production. foreign trade means an exchange of goods and services across international borders. the term international trade has been defined as trade across the frontiers; that is, with the rest of the world. it has been argued that it plays a prominent role in promoting economic growth and productivity in particular, and these debates have been ongoing since several decades ago. furthermore, it has been revealed that internationally active countries tend to be more productive than countries which only produce for the domestic market. as a result of liberalization and globalization, a country's economy has become much more closely associated with external factors such as openness. the benefit of international trade for economic growth and development is difficult to understate. imports bring additional competition and variety to domestic markets, benefiting consumers; and exports enlarge markets for domestic production, benefiting business. trade exposes domestic firms to the best practices of foreign firms and to the demand of discerning customers, encouraging greater efficiency. trade gives firms access to improved capital inputs such as machine tools, boosting productivity and providing new opportunities for growth to developing countries. international trade deals with the economic and financial interdependences among nations; international trade is part of our daily life, and international trade plays a vital role in shaping economic and social performance and prospects of countries around the world, especially those of developing countries. no country has grown without trade. the working of an economy in terms of growth rate and per capita income has been based on the domestic production, consumption activities and in conjunction with a foreign transaction of goods and services. foreign trade has been an area of interest to decision-makers, policy maker as well as economists. it enables nations to sell their domestically produced goods to other countries of the world (adewuyi, 2002). economic theorists like smith have argued that countries engage in external trade to reap the gains that arise from specialized production with each country concentrating on the production of those goods and service that involve the least opportunity cost. various studies on international trade recognize trade as a vital catalyst for economic development. for developing countries, the contribution of trade to overall economic development is immense, owing largely to the obvious fact that most of the essential elements for development such as capital goods, raw materials, and technical know-how, are almost entirely imported because of inadequate domestic supply. increased domestic demand invariably solicits corresponding expansion in exports. to enhance export capacity, therefore, improved technology must be required, and this in turn further pushes up demand for imports. this circle of activities has the tendency of pushing imports far ahead of exports and in consequence, exerts pressures on the balance of payments. prolonged pressures on the balance of payments constitute constraints to economic development and thus, appropriate economic policy measures have to be put in place to streamline external trade transactions to conform to the desired goal of economic development. one of such policies is the external trade policy. external trade policy regulates external trade in line with the domestic requirements of a country. 7.1 benefits of foreign trade there are several economic benefits of trade that could accrue from foreign trade. comparative cost theory has shown clearly that the greatest possible advantage from trade for all countries would be obtained if each nation devotes itself to what it can produce cheaply. this brings about efficient allocation of resources because each country specializes in producing the commodities in which she has a comparative advantage over others. in relations to this theory through foreign trade, countries direct their factors of production to areas where they can produce more. though with foreign trade, total world output of commodities seems to increase. this increase in the world output, also increase the variety of goods available to consumers. and consumers have the chances of exercising their preference. consequently standard of living would also increase. foreign trade also increases competition. a company shielded from foreign competitors is more likely to have market power, which in turn gives it the ability to raise prices above competitive levels. opening up trade fosters competitions and gives the invisible hand a better chance to work its magic. the transfer of technological advances around the world is often though to be linked to foreign trade. since human capacities vary all over the globe, foreign trade brings about an exchange of ideas. all these ideas and qualities are transported from one country to the other through trade. in nigeria, foreign trade helps in no slam measure to accelerate economic growth. it has helped in the importation of machineries such as tractors, plows, industrial plants, and equipment. with all these equipment, nigeria economy is able to increase her productivity and thus quicken economic growth. foreign trade has been a major determinant of foreigner's investment in nigeria. foreign trade has helped in upgrading socio-economic value of citizens because through foreigner's investment, employment opportunities were created. 7.2 problems of foreign trade there are many problems in foreign trade. one of the problems is language, when goods are exported to a foreign country, the labels, informative literature, packing technical handout, should be prepared in the language of the country in which the goods are marketed. there should also be salesmen who are versed with that language and know the habits and likings of the people. another problem is the issue of standardized units, in some countries of the world, the units of length; weight, capacity, and voltage are not the same. the exporters, therefore, shall have to see that the goods are prepared and supplied according to the standard specification of the importing country. sales in foreign currency are also one of the issues, every country has its own currency, which is not the legal tender in another country. buyers abroad prefer to buy the goods in his own currency just as sellers prefer to sell in the currency of his own country. the exporter, therefore, has to calculate the selling price of the goods into the currency units of a country where the goods are sold taking into consideration due to fluctuations in the foreign exchange by hedging. also, when goods are exported or imported a number of documents are to be prepared. 7.3 foreign trade and trade restrictions despite the numerous benefits that accrue to nations as a result of foreign trade, it could realize that many nations employed different tools which aimed at interfering with the international flow of goods and services. it could be noted that governments, to a large extent impose restrictions on their foreign trade. however, a nation can try to increase its welfare at the expense of other nations by restricting trade. trade restrictions could be classified as tariff and non-tariff: the import tariff has received the most attention. this is expressed as a percentage of the value of the imported commodity and is usually imposed to limit the volume of imports. a tariff may be imposed as a means of correcting an adverse balance of payments. if imports, duties may be imposed on imports to make them clearer and likewise reduce their volume. a tariff may be imposed to turn the terms of trade and volume of trade in favor of the country imposing the tariff. also, tariffs may be imposed to raise the level of employment in a country. it is argued that, if a tariff is imposed, more of the national income will be spent on locally produced goods, all other factors being constant. this will encourage local production and more employment opportunities will be created. the extent to which tariff will be effective depends on the degree of retaliation from other countries which are victims of the tools.its effectiveness will also depend on the elasticity of demand for the product in question as well as the elasticity of demand of the foreign countries goods. moreover, non-tariff trade restrictions are imported quota, import licensing, embargo, foreign exchange control, devaluation and import monopoly. an import quota is a direct quantitative restriction on the importation of a commodity and has many of the effects of an import tariff. it specifies the quantity of goods that will come from different countries into a country. the country in question would fix the maximum amount of a commodity that can be imported during a period of time. when the amount to be imported has been determined, import licenses are then issued either to agents or supplying countries, stating the maximum amount each is permitted to import or supply. quota and license enable a government to restrict import to essential quantities needed. if this instrument is not administered well, it could raise prices of the goods and services. devaluation as one of the instruments of trade restriction refers to an increase in the exchange rate from one par value to another. this normally stimulates the devaluing nation's exports, reduces its imports and improves the nation's balance of trade and payment. by increasing the price of a unit of the foreign currency, devaluation makes a nation's imports more expensive in terms of the domestic currency and its export cheaper to foreigners in terms of the domestic currency. other instruments are an embargo, which is a complete ban on the importation of certain goods. it is a straight forward way of trade restriction. foreign exchange which is the importation power of importers, in the case of import monopoly, the government of a country takes over the importation of goods and imports only those that are extremely essential to the nation. 7.4 world trade organization and trade in nigeria nigeria became a founding member of wto with the coming into effect of the marrakech agreement establishing the organization, in january 1995. however, nigeria involvement in the multilateral trading system dates back to 1960, when the country formally joined the then general agreement on tariffs and trade (gatt). the key objective of wto is continuous liberalization of global trade rules which aimed at greater reduction of tariff and non-tariff barriers. wto is guided by the principle of non-discrimination and increased trafficator or tariff bindings. nigeria is bound by the obligation she has undertaken under the wto agreements. by this, it could be inferred that the multilateral trading system must have impacted significantly on nigeria's trade policy given the wto's role of harmonizing global trade rules. nigeria's level of implementations of its wto obligations has to lead to streamlining of trade policy through tariff bindings and this ensures that levels of tariff reduction already attained are not reversed. with the wto obligations, nigeria bound all her agricultural tariff lines at the ceiling rate of 150 percent. the wide range between the level of agricultural bound rates and the high level of unbound industrial tariffs makes nigeria’s tariff profile highly increased. hence, the government’s decision to retain high tariffs and the continuous imposition of import band makes trade policy highly uncertain and unpredictable. this is measured against the wto rules of a consistent, transparent, certain and predicable policy. thus, this depicts a policy disconnection and contradiction. this disconnection and contradiction against wto tenet arise due to the government effort to protect domestic industries. 7.5 trade polices and foreign trade in the nigerian context trade policy since the 1960’s has witnessed extreme policy swings from high protectionism in the first few decades after independence to its current more liberal stance (adenikinju, 2005). attempts were made to use trade policy to promote manufactured exports and enhance the linkages in the domestic economy to increase and stabilize export revenue and scale down the country’s reliance on the oil sector (olaniyi, 2005). trade policies were accordingly directed at discouraging dumping, supporting import substitution, stemming adverse movements in the balance of payment, conserving foreign exchange and generating government revenue (bankole & bankole, 2004). during the first decade of independence, nigeria pursued an import substitution industrialization strategy. this involved the use of trade policy to provide effective protection to local manufacturing industries, through quantitative restrictions and high import duties. trade policy between 1970 and 1976 assumed a less restrictive stance ostensibly because of demands necessitated by the post-war reconstruction. thus, only items that were regarded as nonessential consumer goods were restricted. tariff rated on raw materials were reduced and quantitative restriction on spare parts, agricultural equipment and machinery were relaxed. the 1960s and early 1970s also saw the application of exports such as cocoa, rubber, cotton, palm oil, palm kernel and groundnut. however, in 1973, these duties were eventually abolished, as a result of the oil boom and the need to promote agricultural export as part of the export diversification strategy. furthermore, in 1981, there was a policy shift towards export promotion and a move to intensify the use of local raw materials in industrial production. the central objective of trade policy was to provide protection for domestic industries and reduce the perceived dependence on imports; a means to that objective was a desire to reduce the level of unemployment and generate more revenues from the non-oil sector. accordingly, tariffs on raw materials and intermediate capital goods were scaled down. in addition, 1986 depicts a significant shift in trade policy towards trade liberalization. this is attributable to the adoption of structural adjustment programmes. the period provided for a seven-year (1988-1994) tariff regime with the objective of achieving transparency and predictability of tariff rates. imports under the regime this, attached ad valorem rates. a new seven-year (1995-2001) tariff regime succeeded the previous regime. the tariff structure over the period 1988-2001 increased import duties on raw material and on intermediate and capital goods, while tariffs on consumer goods were slightly reduced. nigeria's trade policy regime as currently contained in the national economic empowerment and development strategy (needs) and trade policy documents, has been geared to enhancing the competitiveness of domestic industries, with a view to encouraging local value-added and promoting as well as diversifying exports. the mechanism adopted to achieve this was a gradual liberation of trade. current reform packages are therefore designed to allow a certain level of protection of domestic industries and enterprise. this has translated into tariffs escalation, with high effective rates in several sectors and lower imports duties on raw material and intermediate goods unavailable locally. this policy perspective has also led to the application of relatively high import duties on finished goods which compete with local production. despite various policies adopted in nigeria in different years, trade policy still suffers some drawbacks. trade negotiations are becoming increasingly complex and hence, even more, challenging for trade policy formulation. the challenge of institutional and human capacity is daunting. the trade ministry which has statutory responsibility for external trade relations lacks the requisite level of skills to effectively engage in the trade policy negotiation process. there seems not to be any standard programmed designed for training and skills acquisition in trade negotiations. training for policy making and trade negotiations requires specially designed programmes. furthermore, the ministry, which runs the affairs of trade policy, remains ill-equipped owing to lack of infrastructure and lack of a conductive environment for effective operations. this is partly due to poor finding for the ministry. in spite of the elaborate mechanism already put in place, there is lack of co-ordination among government establishments and between government and non-state actors. co-ordination has not been very effective. 7.6 theoretical review 7.6.1 mercantilist trade theory mercantilist provided the earlier idea on foreign trade. the doctrine was made up of many features. it was highly nationalistic and considered the welfare of the nation as of prime importance. according to the theory, the most important way for a nation to have become rich and powerful is to export more than its import. some of the mercantilism is jean baptiste colbert and thomas hobbes. it was understood then, that, the most important were in which a country could be rich was by acquiring precious metals such as gold. this was achieved by ensuring that the volume of export was better than the volume of import. trade has to be controlled, regulated and restricted. the country was expected to achieve a favorable balance of payment. tariffs, quotas, and other commercial policies were proposed by the mercantilism to minimize imports in order to protect a nation's trade position. mercantilism did not favor free trade.mercantilism belief in a word of conflict in which the state of nature was a state of war. the need for regulation to maintain order in human affairs and economic affairs were taking for granted. to the mercantilist, the world wealth was fixed. a nation’s gain from trade was at the expense of its trading partners that are, not all national could simultaneously benefit from trade. towards the end of 18th century, the economic policies of mercantilism came under strong attack. david hume criticized the favorable trade balance as being a short-run phenomenon which could be eliminated automatically overtime. the other nation is likely to retaliate. mercantilism was also attacked for their static view of the world economy. adam smith also criticized the nation that the world wealth is fixed with the advantages of specialization and division of labor. with specialization and division of labor, the general level of productivity within a country will increase. despite the criticism faced by the foundation of mercantilism, mercantilism is still alive today. new mercantilism now emphasized employment rather than holding some gold. they also postulate that exports are beneficial as jobs are provided domestically. import is considered bad as jobs are taken away and transferred to the foreign workers. to the new mercantilist, trade is a zero-sum activity which a country must loose for the other to gain. and that there is no acknowledgment that trade can provide benefits to all countries. 7.6.2 absolute advantage trade theory the theory of absolute cost advantage was propounded by adam smith in his famous book. "wealth of nation" 1776. the theory emerges as a result of the criticism levied against mercantilism. he advocated free trade as the best policy for the nations of the world. smith argued that with free trade each nation could specialize in the production of those commodities in which it could produce more efficiency than the other nations, and import those commodities in which it could produce less efficiently. this international specialization of factors in production would result in an increase in world output, which would be shared by the trading nations. thus, a nation need not gain at the expense of other nations, all nations could gain simultaneously. in other words, according to the theory, a nation should specialize in the production of export of commodities in which it has lower cost or absolute cost advantages over others. on the other hand, the same country should import a commodity in which it has higher cost or absolute cost disadvantage. 7.6.3 comparative advantage theory absolute advantage fails to analyze where a country has comparative advantage in the production of two goods, will trade still be necessary or beneficial to the country in question? david ricardo tackled this question. ricardo was the first to demonstrate that external trade arises not from a difference in absolute advantage but from the difference in comparative advantage. by "comparative advantage" is meant by "greater advantage". thus in the context of two countries and two commodities, a trade would still take place even if one country was more efficient in the production of both commodities, provided the degree of its superiority over the other country was not identical for both commodities. ricardo assumed the existence of two countries, two commodities, and one factor of production, labor. he assumed that labor was fully employed and internationally immobile and that the product and factor of prices were perfectly competitive. there are no transport costs or any other impediments to trade, in the context of a model of two countries, two commodities and one factor of production, ricardo obtained the result that a country will tend to export the community in which it has a comparative disadvantage. since comparative costs are the other side of comparative advantage, the theory could be expressed in terms of comparative costs. specifically, the theory now states that a country will tend to export the commodity whose comparative cost is lower in production and the comparative cost is higher in pre-trade isolation. the theory also assumed the level of technology to be fixed for both nations. different nations may use different technology but all firms within each nation utilize a common production method for each commodity. it also assumed that trade is balanced and rolls out the flow of money between nations. the distribution of income within a nation is not affected by trade. a most assumption of the ricardian theory is unrealistic. the theory is based on a labour theory of values which states that the price of the values of a commodity is equal to or can be inferred by the quality of labor time going into its production process. labour theory of values is based on-labor is the only factor of production. labour is used in the same fixed proportion in the production of all commodities. labour is homogenous. this underline proposition is quite unrealistic, because as labor is categorized into skilled, semi-skilled and unskilled labor, there are other factors of production. despite its shortcomings, the law of comparative advantage cannot be discarded off because it found application in the study of economics. the law is valid and can be explained in terms of opportunity cost in the modern theory of trade. 7.6.4 modern theory of trade the heckscher-ohlin theory explains why countries trade in goods and services with each other. one condition for trade between two countries is that the countries differ with respect to the availability of the factors of production. they differ if one country, for example, has many machines (capital) but few workers, which another country has a lot of workers but few machines. according to the heckscher-ohlin theory, a country specializes in the production of goods that it is particularly suited to produce. countries in which capital is abundant and workers and few, therefore, specialize in the production of goods that it is particularly require capital. specialization in production and trade between countries generates, according to this a higher standard-of-living for the countries involved. the production of goods and services requires capital and workers. some goods require more capital – technical equipment and machinery and are called capital intensive. for instance, these goods are cars, computers, and cell phones, other goods require less equipment to produce and rely mostly on the efforts of the workers. these goods are called labor intensive. examples of these goods are shoes and textile products such as jeans. the heckscher-ohlin theory says that two countries trade in goods with each other (and thereby achieves greater economic welfare), if the following assumptions hold; the major factors of production, namely labour and capital are not available in the same proportion in both countries, the two goods produced either require relatively more capital or relatively more labour, labour and capital do not move between the two countries, there are no costs associated with transporting the goods between countries. the citizens of the two trading countries have the same needs. of the above conditions, the central one is the assumption that capital and labor are not available in the same proportion in the two countries. this condition leads to specialization. the country with relatively more capital, specializes but not necessarily fully – in a production of capital-intensive goods (which it exports in exchange labor for intensive goods) while the country with relatively little capital specializes in production of labor-intensive goods (which it exports in exchange for capital-intensive goods). according to the theory, the more different the countries are regarding the capital-to-labor ratio – the greater the economic gain from specialization and trade. 7.7 empirical review several studies have been carried out to provide clear evidence on the nexus trade across the border has on the economy. previous findings on the nigerian economy are majorly reviewed, examples are; ogbokor (2001), investigated the macroeconomic impact of oil exports on the economy of nigeria. utilizing the popular ols technique, he observed that economic growth reacted in a predictable fashion to changes in the regressors used in the study. he also found that a 10% increase in oil exports would lead to 5.2% jump in economic growth. he concluded that export-oriented strategies should be given a more practical support. oviemuno (2007), looks at international trade as an engine of growth in developing countries taking nigeria (1960-2003) a case study, he uses four important variables, which are export, import, inflation, and exchange rate. the findings show that nigeria's export value does not act an engine of growth in nigeria, nigeria's import value does not act as an engine of growth in nigeria and that nigeria's inflation rate does not act an engine of growth in nigeria. egwaikhide (1991) examines the qualitative effects of export (non-oil) expansion on nigeria's economics growth over the period, 1960 to 1983 based on simulation experiment, he observes among others, that a 75 percent rise in non-oil export-led to 1.4 percent increase in real gdp. he concludes that there is need to promote export in order to enhance gdp growth in nigeria. omoju & adesanya (2012) examined the impact of trade on economic growth in nigeria using data from 1980 to 2010. adopting ordinary least square (ols) technique, the study showed that trade, foreign direct investment, government expenditure and exchange rate have a significant positive impact on economic growth. emeka, frederick, and peter (2012) evaluated the role of trade on nigeria's economy for the period 1970 to 2008. by applying a combination of bi-variate and multivariate models, the relationships between the selected macroeconomic variables were estimated. the findings indicated that exports and foreign direct investment inflows have a positive and significant impact on economic growth. the study suggested that there should be a congruence of exports and fiscal policies, towards a greater diversification of non-oil exports by the nigerian government in order to attain the desired growth prospects of external trade. adenugba & dipo (2013) evaluated the performance of non-oil exports in the economic growth of nigeria from 1981 to 2010. findings revealed that non-oil exports have performed below expectations; hence, giving reason to doubt the efficacy of the export promotion strategies that have been adopted. they pointed out that the economy is still far from diversifying from crude oil exports and as such the crude oil sub-sector continues to be the single most important sector of the economy. edoumiekumo & opukri (2013) examined the contributions of international trade (proxy with export and import values) to economic growth in nigeria measured by real gross domestic product (rgdp). time-series data obtained for a period of 27years was analyzed using augmented dickey-fuller (adf) test, ordinary least square (ols) statistical technique, johansen co-integration test and granger causality test. the results showed that positive relationship exists between the variables and there is co-integration among the variables. the granger causality test realized a uni-directional relationship showing that rgdp granger cause export and import granger cause rgdp and export. evidence from empirical studies from other countries also reviewed. li, chen, and san (2010) conducted a research on the relationship between foreign trade and the gdp growth of east china for a period 1981-2008. adopting the unit root test, co-integration analysis, and error correction model, they found out that foreign trade is the long-term and short-term reason of gdp growth, but no evidence proved that there exists long-term stationary causality between import trade and gdp. sun and heshmati (2010) evaluated the effects of international trade on china's economic growth through examining improvement in productivity. both econometric and non-parametric approaches were applied based on a 6-year balanced panel data of 31 provinces of china from 2002-2007. the study demonstrated that increasing participation in the global trade helped china reap the static and dynamic benefits, stimulating rapid national economic growth. also, it revealed that both international trade volume and trade structure towards high-tech exports resulted in positive effects on china's regional productivity. adak (2010) investigates the international trade and economic growth interrelation in turkey using econometric model and ordinary least square test with the analysis covering the years between 1981 and 2007 and found that there is a significant causality between foreign trade and economic growth. he observed that the foreign trade growth rate has pushed up the gdp per capita growth rate in the past three decades after them integration of turkey into the global economy. the findings affirm that international trade is one of the economic growth determinants of turkey. javed, qaiser, mushtaq, saif-ullaha & iqbal (2012) examined the impact of total exports to gdp ratio, import to gdp, terms of trade, trade openness, investment to gdp ratio and inflation on the paskitani economy using time-series data from1973-2010. employing chow test and ordinary least square method, the estimated results revealed that all the explanatory variables have a positive and significant impact on pakistan. the study further discovered that an increase in the import of raw-materials boosted production, employment, and output of pakistan. ulasan (2012) revisited the empirical evidence on the relationship between trade openness and long-run economic growth over the sample period 1960-2000 in contrast to previous studies focusing mainly on the period 1970-1990. the study used various openness measures suggested in literature rather than relying on a few proxy variables. the findings from the cross-country analysis indicated that many openness variables are positively and significantly correlated with long-run economic growth. the study suggested that because of the fragility of the openness-growth association, the significance of openness variables disappear once other growth determinants, such as institutions, population heterogeneity, geography and macroeconomic stability are accounted for. rahmaddi & ichihashi (2011) investigated the relationship between exports and economic growth in indonesia during the period 1971-2008, using a var model. based on the analysis conducted in a vecm framework, the authors found that exports and economic growth exhibit bi-directional causal structure, and concluded that both exports and economic growth are significant to the economy of indonesia. tan (2012) conducted a study on the relationship between international trade and economic growth in singapore. the scholar used ols procedure to test the cross country dataset for the period 1965 to 2009 and concluded that terms of trade have a positive impact on economic growth. similarly, javed, qaiser, mushtaq, sai-ullaha & iqbal (2012) did a study on the effect of international trade on economic growth in pakistan. the ols procedure was used on the time series data for the period 1973 to 2010. the conclusion made was that trade openness has a positive and significant influence on economic growth in the pakistan economy. sarbapriya ray (2011) examined the relationship between foreign trade and economic growth in india, using annual data over the period 1972 – 2011. the co-integration and granger causality tests confirmed that economic growth and foreign trade are co-integrated, implying the existence of a long-run equilibrium relationship between the two, and the presence of bi-directional causality which runs from economic growth to foreign trade and vice versa. safdari, mehrizi & dehqan-niri (2012) investigated the long-run relationship between foreign trade and economic growth in iran between 1975 and 2008 using a vector autoregressive model (var) and data for real gross domestic product, total population, trade volume, gross capital formation and tariffs. their results showed that total population, trade volume, gross capital formation and tariffs have a positive effect on economic growth. our study builds on the more recent time series study of trade and growth. basically, we use gdp as a proxy for economic growth while we utilize non-oil exports, oil export, non-oil import, oil import and balance of payment as proxies for international trade. 8. research methodology 8.1 research design research design refers to the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in the procedure (babbie, 2002). a research design is a framework that indicates the type of information that is needed for the research, the source of such information and the method of collection (udeagha, 2003). this research design employed is the ex-post facto design which seeks to establish the cause-effect relationship and the variables of interest are not under the control of the researcher and therefore cannot be manipulated. 8.2 sources of data data for the empirical study are secondary data sourced from the cbn statistical bulletin from 1981-2015 8.3 population of the research the population of this study shall cover economy in nigeria from the period of 1981 to 2015. 8.4 method of data analysis the statistical technique adopted for this study is multiple regression econometric procedure with the aid of e-view package. the t-test was employed to ascertain the significance of each of the constant parameters, while the diagnostic test based on the coefficient of determination (r2) was used to check for the goodness of fit of the model. the durbin-watson statistic will be employed also to measures the serial correlation in the residuals. if the dw is less than 2, there is evidence of positive serial correlation. a dw statistic output that is very close to one indicates the presence of serial correlation in the residuals. 8.5 model specification in this study, we used non-oil export, oil export, non-oil import, oil import and balance of payment as our independent variable which is regressed against economic growth measured by gdp. the functional form on which our econometric model is given thus: gdp=f(noi, oi, noe, oe)………………………………………….…….(1) the econometric model is specified as follows: gdp=β0+ β1noi+β2oi+β3noe + β4oe+ μ……………..……….…………(2) where: gdp=gross domestic product noi= non-oil import oi= oil import noe= non-oil export oe= oil export where β0>0, β1>0 β2>0 β3>0 and β4>0 β0, β1, β2 β3, β4, β5= constant parameters and μ = the error term 8.6 test of hypothesis null hypothesis h0 : β1= β2= β3= β4= β5= 0 alternative hypothesis h1: β1 or β1 or β1or β1 or β1 or any four of them or all are non zero at least one of them is significant at 5% degree of freedom. the f-test is adopted for the overall significance of the model.the higher the value of the f-statistics, the greater the greater the overall significance of the estimated regression. if f-calculated is greater than the f-tabulated, the f-statistics shows a higher degree of association between the dependent variables. 9. data presentation the data for this study on the economic variables are presented in table1 in appendix a table 2: descriptive statistics gdp oil_import non_oil_import oil_export non_oil_export  mean  17827.15  612.4145  2055.931  3823.662  206.6006  median  4189.250  175.8542  661.5645  1212.499  24.82290  maximum  94144.96  3064.256  9350.843  14323.15  1130.171  minimum  94.32502  0.051800  5.069700  7.201200  0.203200  std. dev.  28092.36  901.9035  2845.097  4886.111  337.5611  skewness  1.688211  1.581999  1.341275  1.027825  1.533366  kurtosis  4.405487  4.310943  3.385043  2.585040  3.849571  jarque-bera  19.50612  17.10545  10.71048  6.413582  14.76797  probability  0.000058  0.000193  0.004723  0.040486  0.000621  sum  623950.4  21434.51  71957.59  133828.2  7231.022  sum sq. dev.  2.68e+10  27656616  2.75e+08  8.12e+08  3874214.  observations  35  35  35  35  35 source: e-view output, version 9 the descriptive statistic presented in table 2 shows the mean, range, minimum, maximum and standard deviation of all the variables under consideration. the table indicates a mean gdp, oil import, non oil import, oil export and non-oil export trade as a measure of international trade are n17,827.15 billion, n 612.4145 billion, n2,055.931 billion, n3823.662 billion and n206.6006 billion respectively, with minimum of n94.32502 billion, n0.051800 billion, n5.069700 billion, n7.201200 billion and n0.203200 billion respectively.this show a clear clue of the activities of international trade in nigeria under the period of investigation. however, with a maximum of n94,144.96 billion, n3,064.256 billion, n9,350.843 billion, n14323.15 billion, and n1130.171 billion respectively show that international trade and economic growth is fairly well encouraging. this gives a clue of the performance of international trade and economic growth for the years under examination. 9.1 data analysis the impact of international trade (measured by oil import, non-oil import, oil export and non-oil export) on economic growth (measured by gross domestic product) table 3: multiple regressions dependent variable: gdp method: least squares date: 01/18/17 time: 13:19 sample: 1981 2015 included observations: 35 variable coefficien t std. error t-statistic prob.   c -141.9804 1218.034 -0.116565 0.9080 oil_import 4.549808 4.935327 0.921886 0.3639 non_oil_import 8.946531 1.114886 8.024613 0.0000 oil_export -2.194348 0.692323 -3.169546 0.0035 non_oil_export 25.07136 11.90185 2.106510 0.0436 r-squared 0.968471     mean dependent var 17827.15 adjusted r-squared 0.964267     s.d. dependent var 28092.36 s.e. of regression 5310.330     akaike info criterion 20.12426 sum squared resid 8.46e+08     schwarz criterion 20.34645 log-likelihood -347.1745     hannan-quinn criter. 20.20096 f-statistic 230.3770     durbin-watson stat 1.114779 prob(f-statistic) 0.000000 from table 3 above, the result shows that all the explanatory variables significantly impact on gross domestic product. it could be also observed that oil import on gdp contributes (4.549) this mean that for every unit change in oil import there is a corresponding change of 4.549 in gdp. on the basis of a prior expectation, the coefficient is incorrect and positively signed. therefore, the result revealed that oil import is insignificantly affecting the economic growth of the nation. the result of non-oil import also shows that non-oil import on gdp contributes 8.946.this means that for every unit change in non-oil import there is a corresponding change of 8.946 in gdp. on the basis of a prior expectation, the coefficient is incorrect and positively signed. therefore, the result revealed that non-oil import is significantly affecting the economic growth of the nation. looking on the oil export, the result shows that oil export on gdp contributes -2.19. meaning that for every unit change of oil export there is a corresponding unit change of -2.19, showing an inverse relationship between oil export and gross domestic product in nigeria. on the basis of a prior expectation, the coefficient is incorrect and negatively signed. therefore, the result revealed that oil export is negatively and significant on economic growth of nigeria. the result further, shows that the nation oil export contributes most to the economic growth of nigeria. the value of 25.07 indicates that for every unit change of non-oil export there is a corresponding unit increased of 25.07 on gdp in nigeria. on the basis of a prior expectation, the coefficient is correct and positively signed. therefore, showing that non-oil export positive and significantly affect the growth and development of the nation. meanwhile, the coefficient of determination (r2) of the multiple regressions is 0.968, which implies that the explanatory variables which are oil import, non-oil import, oil export and non-oil export, significantly impact the dependent variable (gdp). this means that the impact of international trade on nigerian economic growth (gdp) explain or account 96.8% influence or movement on the real gross domestic product of nigeria, while only 3.2% account could be explained by other variables or factors not included in the model. the adjusted r2 of 0.96 is close to the r2 value of 0.968.meaning that the model is fit for making a generalization. furthermore, the value of f= 230.3770 indicates the models' goodness of fit to the data.also looking at the d.w of 1.11 shows an absence of positive auto correlation among the variables in the model. finally, looking at the p-value of international trade is < 0.05 at 5% degree of freedom. therefore, the study concluded that there is a positive significant relationship between international trade and economic growth (gdp) in nigeria. all explanatory variables (oil import, non-oil import, oil export and non-oil export) were significantly joint predictors of economic growth in nigeria. for instance, non-oil export is positive and significant to gdp. this implies that an increase in non-oil export will boost economic growth. the finding agrees with egwaikhide (1991); emeka, federick & peter (2012); and adenugha & dipo (2013). they found that non-oil export trade had a positive impact on economic of nigeria. but it has not contributed meaningfully to economic growth and development due to the low output of the manufacturing sector and undeveloped local market base. the overall result of international trade on economic growth indicates a positive significant relationship with gdp. this finding is in line with edoumiekumo & opukri (2013), adak (2013), hehmati (2010), san (2010), and iqbal (2012). they found a positive significant relationship between international trade and economic growth in nigeria. 10. recommendation and conclusion based on the empirical findings of this study, the following recommendations are made for the purpose of effective policy formulations in the area of international trade and economic growth. · international trade should be on the development of dynamic, rather than a static comparative advantage, emphasis should be on the promotion of non-primary exports and non-oil export i.e. manufactured goods. international trade strategy must be based on the recognition of the fact that the international economic environment is not a "level playing field" government has to take necessary measures to enhance productivity and competitiveness of enterprises in the export sector, i.e. upgrading infrastructures, enhancement of human capital development, development and improvement of technology through increase allocation of resources to research and development through government spending. · central bank of nigeria should intensify the deregulation policy of the exchange rate sector of the country made available foreign currency to exporters and investors. promotion of exports within the context of sub-regional and regional economic integration should be vigorously pursued to expand nigerian international market and the importation policy of the government should adhere to in order to control dumping and to encourage the local investors. · monetary authority of the country should maintain a double-digit inflation and interest rate, for now, to motivate foreign investors and the commercial banks until development level of nigeria economy reach a significant level where both inflation and interest rate can be reduced to a single digit or zero-free. · excise duties should be lowered so as to encourage local industries to export their goods and services. · a lifting of trade barriers on local output should not be followed by the introduction of new ones. only the importation of capital goods that are essential should be encouraged since not all importation are necessary for economic growth. · the economy also has to fight seriously against the monocultures export syndrome · a government should ensure political and macroeconomic stability so as encourage investment, both local and foreign and guarantee business survival. · the government should encourage export diversification. non-oil sector exports should be encouraged and concentration on oil sector export 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(2014): the impact of international trade on economic growth in south africa: an econometrics analysis. mediterranean journal of social sciences mcser publishing, rome-italy, vol 5 no 14 sikiru o. a. & james o. a. (2014): exploration of the impact of international trade on the growth of nigeria’s manufacturing sector: 1975-2010. journal of business administration and management sciences research vol. 3(1), pp. 006-011 sun, p. & heshmati, a. (2012): international trade and its effect on economic growth in china. iza discussion paper no. 5151, the institute for the study of labour, germany. tan, c. j. k. (2012): international trade and economic growth: evidence from singapore. a paper submitted in partial fulfillment of the requirement for the degree of master’s of arts in the graduate school of arts and science, columbia university. todaro, m.p. (2000): international business: environments and operations. 9th ed. prentice hall usman owolabi akeem (2011): performance evaluation of foreign trade and economic growth in nigeria, research journal of finance and accounting www.iiste.org appendix a table 1 annual oil import, annual non-oil import, annual oil export, annual non-oil export and real gross domestic product (gdp) in nigeria (1981 – 2015) year gdp(n’ billion) non-oilimport(n’ billion) oil import (n’ billion) non-oil export(n’ billion) oil export (n’ billion) 1981 94.33 12.7 0.1 0.3 10.7 1982 101.01 10.5 0.2 0.2 8.0 1983 110.06 8.7 0.2 0.3 7.2 1984 116.27 6.9 0.3 0.2 8.8 1985 134.59 7.0 0.1 0.5 11.2 1986 134.60 5.1 0.9 0.6 8.4 1987 193.13 14.7 3.2 2.2 28.2 1988 263.29 17.6 3.8 2.8 28.4 1989 382.26 26.2 4.7 3.0 55.0 1990 472.65 39.6 6.1 3.3 106.6 1991 545.67 81.7 7.8 4.7 116.9 1992 875.34 123.6 19.6 4.2 201.4 1993 1,089.68 124.5 41.1 5.0 213.8 1994 1,399.70 120.4 42.2 5.3 200.7 1995 2,907.36 599.3 155.8 23.1 927.6 1996 4,032.30 400.4 16.2 23.3 1,286.2 1997 4,189.25 678.8 166.9 29.2 1,212.5 1998 3,989.45 661.6 175.9 34.1 717.8 1999 4,679.21 650.9 211.7 19.5 1,169.5 2000 6,713.57 764.2 220.8 24.8 1,920.9 2001 6,895.20 1,121.1 237.1 28.0 1,839.9 2002 7,795.76 1,151.0 361.7 94.7 1,649.4 2003 9,913.52 1,681.3 398.9 94.8 2,993.1 2004 11,411.07 1,668.9 318.1 113.3 4,489.5 2005 14,610.88 2,003.6 797.3 106.0 7,140.6 2006 18,564.59 2,397.8 710.7 133.6 7,191.1 2007 20,657.32 3,143.7 768.2 199.3 8,110.5 2008 24,296.33 4,277.6 1,315.5 525.9 9,861.8 2009 24,794.24 4,411.9 1,068.7 500.9 8,105.5 2010 54,612.26 6,406.8 1,757.1 711.0 11,300.5 2011 62,980.40 7,952.3 3,043.6 913.5 14,323.2 2012 71,713.94 6,702.3 3,064.3 879.3 14,260.0 2013 80,092.56 7,010.0 2,429.4 1,130.2 14,131.8 2014 89,043.62 8,323.7 2,215.0 953.5 12,007.0 2015 94,144.96 9,350.8 1,725.2 660.7 8,184.5 source: cbn statistical bulletin, 2015 copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. 28 47 asian finance & banking review; vol. 2, no. 2; 2018 issn 2576-1161 e-issn 2576-1188 impact factor: 3.3 published by centre for research on islamic banking & finance and business 1 money market instruments and nigeria inflation rate: a time series study philip umasom 1 1 department of banking and finance, rivers state university, port harcourt, nigeria correspondence: philip umasom, department of banking and finance, rivers state university, port harcourt, nigeria received: july 23, 2018 accepted: august 4, 2018 online published: august 10, 2018 abstract this study empirically examined the effectiveness of money market instruments on nigerian inflation rate. the objective is to investigate the existing relationship between money market instruments and nigerian inflation rate, data was sourced from central bank of nigeria statistical bulletin. multivariate model were formulated having inflation rate (infr) as the function of percentage of treasury bills to gross domestic product (tb/gdp), percentage of stabilization securities to gross domestic product (sts/gdp), percentage of treasury certificate to gross domestic product (tc/gdp), percentage of eligible development stock to gross domestic product (eds/gdp), percentage of central bank of nigeria short term fund to gross domestic product (cbnsf/gdp) and percentage of call money scheme to gross domestic product (cms/gdp). the ordinary least square (ols) properties of co integration, augmented dickey fuller unit root, granger causality test and vector error correction model (vecm) were employed to determine the relationship between the money market instruments and nigerian inflation rate. findings revealed that money market instruments are statistically significant in explaining variation in nigerian inflation rate. we therefore recommend that the money market should well be structured, properly managed and its operational efficiency enhanced to achieve the monetary policy objective of price stability. keywords: money market instrument, inflation rate, commercial paper, treasury bills, treasury certificates. 1. introduction the opinion that inflation is a monetary phenomenon is one of the central theses of monetary economics. the traditional view of the classical economist was that money is insignificant and does not matter in the economy. the keynesian mainstream economists argue that money has indirect effect on the economy, while neo-classical economists of monetarism assign significant role to money in the economy, and the theory of monetary policy. a growing number of emerging market economies are moving towards inflation targeting as the guiding framework for monetary policy actions (mukherjee and bhatta, 2011), thus achieving low inflation is a macroeconomic objective of monetary policy. the importance of the money market can not be overemphasized, to the government, the money market instruments helps in meeting government short-term fall in revenue through sales of securities such as eligible development fund, treasury certificates. to the business firms like the banks, it bridge the liquidity challenges by making it possible to invest excess liquidity and source shortage of liquidity while to the monetary authority, it is a mechanism for the achievement of monetary policy objective such as price stability. the money market is a component of financial market and constitutes the market for the short-term financial instruments with maturity of within one year. the existence of the money market facilitates trading in short term debt instruments to needs of large users of funds such as the government, banks and similar institutions (igbatayo, 2011). it plays key role in bank liquidity management and transmission of monetary policy by providing the appropriate instruments (nwosu and hamman, 2008). unlike the capital market, the money market plays an important role in the mobilization of financial intermediation by meeting short-term cyclical fluctuation in the www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 2 economy. the nigerian money market has been in existence for decades and has grown in the number of instruments and the institutions. the quantity theory of money states that period of sustained growth and decline in inflation are accompanied by a faster or slower growth of monetary aggregate adjusted for long-term trends of output and money velocity (lyziaka et al, 2012). there are various stages in which the monetary policy transmission process undergoes. under inflation targeting, the key monetary policy instrument is the short term interest rate. the transmission process involved variation in monetary policy rate which lead to movement in retail interest rate. understanding the transmission of monetary policy to inflation and other real economic variables is a key for central bankers to conduct monetary policy effectively. the monetary policy objective of price stability can be tarnished if the policy does not match with other fiscal measures in the economy (ezirim, 2005). for a developing economy like nigeria, it is vital to analyze monetary policy transmission such as the money market instruments and its effect on inflation for several reasons, first to determine the appropriate channel and the effectiveness of monetary policy in managing inflation, second to examine the effect of government fiscal measures on inflation without the monetary policy supply channel, third to measure its effect on the aggregate demand and aggregate supply (bussimis and magginas, 2006) however, the challenges facing the effectiveness of nigeria money market as effective instrument of managing inflation ranges from inconsistent policy of the regulators and the monetary authorities, for instance, the recent withdrawal of 75% of government fund from the banking institutions to control inflation constrain transaction in the money market macroeconomic and monetary policy shocks and management factors (omotar, 2007). the divergence between the monetarist, the classical and the neo-classical on inflation as a monetary phenomenon has continue to generate debate as the effectiveness of monetary policy in controlling inflation (demchuk et al, 2012). the dent for effectiveness of monetary policy is deepening in an underdeveloped financial market like nigeria (andreas, 2010). despite the application of the monetary policy tools such as the money market instruments, inflation has continued to pose challenges to the monetary authorities. some blamed it on the inability of the monetary authorities to enforce compliance through the monetary channel in the banking and non-banking institutions (gogor, 2011), while others traced it to the fiscal imbalance characterized with expansionary fiscal policy with deficit budget (umeredu, 2007). therefore this paper intends to study the relationship between money market and nigerian inflation rate. the rest part of this paper are as follows; section two discuses empirical studies on effect of insurance on economic growth, section three discusses the methodology adopted in the study, section four presents and analyze results while section five concludes and make recommendations from the findings of the study. 2. literature review money market: money market means market where money or its equivalent can be traded. money is synonym of liquidity. money market consists of financial institutions and dealers in money or credit who wish to generate liquidity. it is better known as a place where large institutions and government manage their short term cash needs. for generation of liquidity, short term borrowing and lending is done by these financial institutions and dealers. money market is part of financial market where instruments with high liquidity and very short term maturities are traded. due to highly liquid nature of securities and their short term maturities, money market is treated as a safe place. hence, money market is a market where short term obligations such as treasury bills, commercial papers and banker’s acceptances are bought and sold. benefits and functions of money market: money markets exist to facilitate efficient transfer of short-term funds between holders and borrowers of cash assets. for the lender/investor, it provides a good return on their funds. for the borrower, it enables rapid and relatively inexpensive acquisition of cash to cover short-term liabilities. one of the primary functions of money market is to provide focal point for rbi’s intervention for influencing liquidity and general levels of interest rates in the economy. rbi being the main constituent in the money market aims at ensuring that liquidity and short term interest rates are consistent with the monetary policy objectives. evaluation of nigerian money market instruments treasury bills these are money market securities issued by the federal government of nigeria. they are sold at a discount, mature within 90 days of the date of issue. they provide the government with a highly flexible and relatively cheap means of borrowing cash. the treasury bills ordinance of 1959 authorized the first treasury bills issue in nigeria. the ordinance empowered the federal minister of finance to direct cbn to issue treasury bills on behalf of government, provided that the amount of treasury bills outstanding at any one time did not exceed 10 per cent of the estimated revenue of the federal government in the year that the treasury bills were issued. between 1979 and 1999, especially between 1992 and 1999, the issue of treasury bills experienced a phenomenal increase. for the two decades the nigerian economy was in limbo and so was the revenue of government. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 3 in the fiscal year 2001, cbn high-yield certificates with 180 and 365 days tenor, and interest rates of between 19% and 20% were issued for the first time, as additional instrument, for combating the persisting excess liquidity in the economy. in april 1999, the authorities announced what seemed to be an innovative and potent policy, for dealing with the menace of excess liquidity. a treasury bill is one of the most important money market instruments used in nigeria (ezema, 1993). treasury bills are issued by the federal government through the central bank. when the government wants to borrow to meet its budgetary needs, treasury bills are then issued. treasury bills are particularly important to, and are also popular with commercial banks (ezema, 1993). moreover, treasury bills count as liquid assets of commercial banks while at the same time earning handsome interest rate for the holders. above all, it is easily marketable. banks that are faced with liquidity problems (needs) can easily sell treasury bills for cash in the money market. a treasury bill is a much secured means of holding short-term assets; it also has a stable price (ezema, 1993). commercial paper these are short-term promissory notes issued by the cbn and their maturities vary from 50 to 270 days, with varying denominations. they are debt that arises in the course of commerce. the first recorded commercial papers were issued in nigeria in 1960. commercial papers are as old as the treasury bills in nigeria and constitute to date the third largest money market instrument in the arena of nigerian money market assets (onoh, 2002). produce bills were first issued in 1962 to finance the export of produce. determined to reduce the marketing boards’ dependence on the london finance houses for bridging finance, cbn began to fund the difference in the credit provided by nigerian banks and the total funds required to cover the marketing of major export crops. commercial papers are the means by which commercial houses, through their bankers (mostly merchant or investment banks) raise short-term funds of three to six months (ezema, 1993). this is only possible if such funds attract interest rates less than bank overdrafts. for instance, if the interest on an overdraft is 18%, and the commercial paper rate is between 16% and 17%, the company may opt for commercial paper. in that case, it is the standing of the company that matters and not that of the agent bank, since the paper does not carry the guarantee of the agent bank. this observation will compel companies that want to issue cps to strive to raise their market value through better performance and other indices of performance rating (uremadu, 2004). the main attraction to an investor is that interest is paid upfront. it means that the investor only pays the discounted value, while at maturity he receives the face value of the commercial papers. the risk therefore is that if the borrower should go bankrupt suddenly the investor may lose his investment (ezema, 1993). it is usually for investors in commercial papers to just seek the advice of their bankers and credit rating agencies, before investing in cps. call money scheme this refers to money lent by the banks on the understanding that it is repayable at the bank’s demand or at short notice. overnight loans are simply bank reserves that are loaned from banks with excess reserves to banks with insufficient reserves (umeredu, 2006). in july 1962 cbn established a call-money facility to enable commercial banks to lend their surplus funds on an overnight basis. the call-money scheme was administered by cbn. treasury certificate these are similar to tbs but are issued at par or face value and pay fixed interest rates. these fixed in interest rates are called coupon rates. accordingly, in the latter part of 1968 two treasury certificates were introduced. one matured in a year, the other in two years. the treasury certificate maturing after one year carried a discount rate of 4% percent, which at that time was equal to the then minimum rediscount rate of cbn (onoh, 2002). treasury certificates are usually issued for a period of one to three years, like treasury bills which have a life span of about 90 days. treasury certificates yield a much higher interests than treasury bills. they can equally count for liquidity requirements of commercial banks like treasury bills (ezeama, 1993). treasury certificates are other avenues through which commercial banks invest their surplus funds without defaulting in liquidity requirements stipulated by the central bank. they are a secure investment with no risks of default. interbank market interbank lending in nigeria began in 1962 with the introduction of the callmoney market. the call-money market enabled commercial banks to lend or borrow from one another from a few hours, overnight to a few days or longer (onoh, 2002). interbank market crisis in the 90s the introduction of the prudential guidelines, which required banks to make 100% provisioning for bad debts, the adoption of the basle accord with its capital risk weights, the distress in the banking system, the advance deposit by banks for the purchase of lucrative foreign exchange, the transfer of major accounts and re1ted accounts of government to the cbn and the reintroduction of the stabilization securities, which retired billions of naira from the money market to the cbn vault, aggravated the tight liquidity position at the money market (okereke, 2003). www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 4 eligible development stocks eligible development stocks have made only modest impression as a money market instrument, since the instrument was introduced in 1976. these are usually known as federal republic of nigeria development stocks (ezema, 1993). in most cases, they are issued at par and redeemed at par. interest thereon is payable half-yearly at fixed rates. the advantage of eds is that the central bank is always ready to buy them back at any time, at market s. o. uremadu, determinants of financial system liquidity (1980-2005). besides, commercial banks are allowed to hold some of their assets in development stocks. certificates of deposits (cd) nigeria’s money market is characterized by a shortage of debt instruments and intensive efforts to find new ones. with the abolition of the call-money scheme of the treasury certificates issue in april 1975, and the stagnating treasury bills market, new debt instruments became imperative, if the money market was to survive. the certificates of deposit were among the new instruments introduced in 1976 to fill the vacuum left by retired treasury bills and treasury certificates, and to increase interbank lending (osiegbu, 2006). they were issued by the banks themselves as interbank debt instruments. two types of certificates were approved. cds were introduced in nigeria in 1975 as interbank debit instruments at a time where there was a shortage of government short-term debt instruments and the banking system was also experiencing excess liquidity (falegan, 1987 and uremadu, 2005). it was introduced to mop up excess liquidity. the main advantage of cds are that they can be discounted in the event of urgent needs for cash, the commercial banks invest their excess funds to earn interest returns on them; and they can be purchased by banks, in preference to making interbank loans for fixed terms (ezema, 1993; beecham, 1994 and uremadu, 2005). banker& unit fund (buf) the buf was introduced in 1976 as cbn’s own money-market instrument. it was linked to the federal government loans stocks. commercial banks and merchant banks, which are statutorily required to hold a certain percentage of their deposits in liquid assets, have found investment in bankers’ unit funds very useful, because it is acceptable for the purpose of satisfying the statutory liquid asset requirement. bankers acceptances bankers’ acceptances were introduced in nigeria in 1990. the main holders of this instrument are commercial banks, merchant banks and discount houses. when a banker accepts a promissory note or bill of exchange drawn on its customer, the instrument becomes a banker’s acceptance. bankers’ acceptances are borrowings by banks on behalf of their customers for which the borrowing bank is liable (luckett, 1984 and ezeama, 1993). they are therefore considered generally less risky than commercial papers. they have maturities of three to six months (i.e. 90 – 180 days) as commercial papers. bankers’ acceptance can be issued by individuals, companies or another bank and accepted by a bank on behalf of its customers (ezema, 1993). theories of inflation economic theories reach a variety of conclusions about the responsiveness of output growth to inflation (adalid and detken, 2007). theories are useful, as they account for some observed phenomenon. historically, in the absence of what is termed ‘persistent inflation’, the early inflation-growth theories were built on cyclical observations. persistent inflation is regarded as a post world war ii phenomenon. before then, bouts of inflation were followed by bouts of deflation. having showed no upward or downward trend, inflation was said to behave like a ‘lazy dog’. it stays at a particular level unless and until there is a disturbance, thereafter, it moves to another level, at which it settles. theory, therefore sought to account for a positive correlation between inflation and growth. the aggregate supply-aggregate demand (as-ad) framework also postulated a positive relationship between inflation and growth where, as growth increased, so did inflation. in the 1970s, however, the concept of stagflation gained prominence, and the validity of the positive relationship was questioned. widely accepted at that time, the phillips curve relationship had appeared to not hold. this was evidenced by periods of low or negative output growth, and inflation rates that were historically high. during this period, prices rose sharply, while the economies around the world experienced massive unemployment. money and monetarism monetarism has several essential features, with its focus on the long-run supply-side properties of the economy as opposed to short-run dynamics. milton friedman, who coined the term “monetarism”, emphasized several key longrun properties of the economy, including the quantity theory of money and the neutrality of money. the quantity theory of money linked inflation and economic growth by simply equating the total amount of spending in the economy to the total amount of money in existence (aksoy et al, 2009) and also suggests that control in the money supply will help in the fight against inflation. friedman proposed that inflation was the product of an increase in the supply or velocity of money at a rate greater than the rate of growth in the economy. friedman also challenged the concept of the phillips curve. his argument www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 5 was based on the premise of an economy where the cost of everything doubles and where individuals have to pay twice as such for goods and services, but they don't mind, because their wages are also twice as large. individuals anticipate the rate of future inflation and incorporate its effects into their behaviour. as such, employment and output is not affected. economists call this concept the neutrality of money. neutrality holds if the equilibrium values of real variables -including the level of gdp – are independent of the level of the money supply in the long-run. superneutrality holds when real variables including the rate of growth of gdp are independent of the rate of growth in the money supply in the long-run. if inflation worked this way, then it would be harmless. in summary, monetarism suggests that in the long-run, prices are mainly affected by the growth rate in money, while having no real effect on growth. if the growth in the money supply is higher than the economic growth rate, inflation will result (assenmacher and gerlach, 2006). empirical review ajakaiye (2002), using a cross-section of 80 countries during the period 1960-1989 found that financial development promotes economic growth when other growth conditioning variable are taken into account. mordi (2010) provides country specific evidence in a study that focuses on the economies of argentina, brazil, chile, germany, indonesia, korea, and taiwan during the post-world war ii period. examining the relationship between adopted financial policies and economic growth in these countries, mckinnon concluded that better functioning financial system aid faster growth. khan et al (2006) employed a dataset comprising 159 countries over 1960-1999 and their analysis confirm a strongly positive and statistically significant relationship between financial depth indicators covering banking system and securities market and economic growth. shan & morris (2002) used a granger causality procedure to investigate the relationship between financial development and economic growth for nine oecd countries and china by estimating a vector autoregression (var) model. the results of their study show that five out of ten countries have a bilateral granger causality; three of them have reverse causality with economic growth leading to financial development while two countries do not have a causal effect at all. schoar (2009) agrees that a competitive banking sector is necessary in facilitating firm growth and competition, and that equity markets constitute only a small portion of overall financing in developing countries. the author underscores the importance of scale for banks, and tiny banks will not garner sufficient capital to finance small businesses for expansion. in particular, the banking sector should be established and tailored to improve the real economy and, as a tool to create jobs and opportunities. schoar (2009) proposes a two-tier banking system where one tier consist of small banks that serve basic financial needs and the other tier should consist of larger banks that serve medium firms that can create jobs for many others and will grow to large scales. agha et al (2005) in a study of the transmission mechanism of monetary policy in pakistan asserted that the role of bank lending is prominent because of the dominance of the banking sector. other factors that might have enhanced the banks’ role included financial reforms, market-based credit allocation and crowding-in of private sector credit due to the decline in fiscal dominance. the extant literature shows that the bank lending channel is an important medium through which monetary policy permeates the real sector of the economy. therefore, in the pursuit of price stability by monetary authorities, the consideration of the impact of lending on monetary aggregates is a necessary condition for attaining macroeconomic stability. a major implication of the credit view is that monetary policy will have a greater effect on expenditure by smaller firms, which are more dependent on bank loans than it will on large firms, which can access the credit markets directly through stocks and bond markets. nzotta and okereke (2009) the form and function of financial institutions are country-specific and would rely on the legal and political system as well as the evolving economic activities. he, therefore, argues that a suitable policy objective would be to craft laws, regulations, and institutions that would create an enabling environment to engender competition among financial institutions in the provision of essential credit, risk, and liquidity services to the real economy. he states that although the stock markets do not provide much capital to firms, they provide complementary risk diversification services that facilitate the efficient allocation of credit. zingalas (2001) favors a more fragmented and competitive banking sector, which according to him creates a fluid transition from a pure banking system to a system that relies both on markets and banks, as economic activities expand. thoma (2009) developing countries require not only small banks and microfinance institutions that support small borrowers, but could also do with relatively sophisticated financial instruments such as hedging price risks through futures markets, insuring against crop failures, purchasing farm equipment through pooling arrangements, and managing the problem brought about by seasonality. he acknowledges inadequate information on the financial www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 6 history and worthiness of potential borrowers as a challenge and that small banks were better positioned to collect such information. demirguc and maksimovic (2002) use firm level data and a financial planning model to show that more developed financial system-as a proxy by larger banking systems and more liquid stock markets allow firms to grow faster than the rates they finance internally. demirguc and maksimovic (2002), love (2003) also uses firm level data and shows that the sensitivity of investment to internal funds is greater in countries with less developed financial systems. beck et al. (2005) use firm level survey data for a broad set of countries and shows that financial development eases the obstacles that firm face to grow faster; and this effect is stronger particularly for smaller firms. recent evidence also suggests that access to finance is associated with a faster rate of innovation and firm dynamism consistent with the cross – country finding that finance promotes growth through productivity increases. wurgler (2000) shows that countries with higher levels of financial development increase investments more in growing industries and decrease investment more in declining industries, compared to underdeveloped financial systems. similarly guiso et al. (2002) examine the individual regions of italy. it finds that local financial development enhances the probability that an individual starts a business, increases industrial competition and promotes growth of firms. and these results are stronger for smaller firms which cannot easily raise funds outside of the local area. bertrand et al. (2007) provide firm level evidence from france that shows the impact of 1985 deregulation, eliminating government intervention in bank lending decision fostered greater competition in the credit market, inducing an increase in allocation efficiency across firms. honohan (2004) shows that even at the same average income, economies with deeper financial system have fewer poor people. ndebbio (2004) studied the relationship between financial deepening and economic growth and development using selected sub-saharan african countries for just one decade (from 1980-1989). he used m2/gdp and growth rate of per capita real money balances (pcrmb) to represent financial deepening and other control variables which affect economic growth such as the rate of inflation, human capital and the growth rate of labor as explanatory variables as against real per capita gdp which is dependent variables. his regression results showed that financial deepening does positively affect per capita growth of output in these selected ssa countries, even though his parameter estimate of the variable of financial deepening was insignificant in one of his equations and he attributed this to shallow finance and the absence of well functioning capital market in most ssa countries. ojo (1992) discovered that movement in monetary aggregates indicates wide variations from the stipulated targets in most instances. he attributed this to excessive government spending covered by high powered money, which adversely affects macroeconomic stability. iyoha (1995) in his critical assessment of the success of indirect tools of liquidity management concludes that it has not actually met the expectation of the monetary authorities. oke (1993) in his empirical study of the indirect tools of monetary controls discovers that the policy has raised the number and diversity of the financial institution as well as the scope of financial services they offer. at the level of other indices such as money supply growth, bank credit, interest rate, domestic output and exchange rate, he observes that while money supply and bank credit increased dramatically, interest rate structure was seriously distorted due to a number of factors, which include: the transfer of government deposits from commercial banks to the cbn in 1989; the emergence of distressed banks in 1990; introduction of stabilization securities; etc. the period of rising inflation, that is, 1992 and 1993, however, saw an unprecedented rise in the level of interest rates and the widening of the gap between the deposit and the lending rates. exchange rate, on the other hand, depreciated persistently while marginal changes were recorded in the gross domestic product (gdp) within the period under review. jibia (2005) discovers that the unattractiveness of the omo instruments as reflected in the treasury bills rate and the high level of fiscal indiscipline across the three tiers of government impair the effectiveness of the omo operations as an instrument of liquidity management. at the theoretical level, the rule of allowing money to grow at 4 – 5%, or at a rate consistent with the economic growth of a nation is the lever of not only monetary management, but also of the entire economy under the monetarists’ school of thought. this sustains and promotes a non-inflationary growth and economic stability. gittins (2003) argues that while monetary policy can be implemented almost instantly, the implementation of fiscal policy is delayed by the time it takes to design an effective intervention, and the time it takes to put administrative apparatus required to implement it. on the channel of policy transmission, liquidity, credit and exchange rate were identified as the main conduits through which the policy works in an economy. the liquidity channel otherwise called the interest rate channel exists when short term interest rates react to changes in liquidity or money supply to influence the operations of the economy. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 7 friedman and schwartz (1963) state that an expansionary omo operation, (purchase of treasury bills in the open market) increases the stock of money in circulation and the ability of the banks to create more credits due to the positive effect of omo on of level of their reserves. to achieve an efficient allocation, the bank and the non-bank public will reorder their portfolios in favor of the real sector and thereby increase the level of gross domestic product (gdp). okun (1963) emphasizes the view that changes in money supply affect economic activities just as changes in economic activities affect money supply through the concept of credit availability. 3. material and methodology econometrics methodology is employed in this study as the analytical tool for the examination of the relationship between money market and inflation in nigeria. consequently, the ordinary least squares method is adopted to investigate the long-run relationship between money market and inflation. the error correction model is also adopted to examine the short-run dynamics. the model states that inflation is a function of monetary phenomenon is captured in the monetary theory of inflation. to further examine the relationship between money market instruments and inflation, the study employed johanson’s cointegration test. the secondary data used for this study covering the period 1981-2014 were obtained from the central bank of nigeria statistical bulletin, national bureau of statistics. model specification in order to examine the impact of money market on inflation, we formulate the model below: infr = f (tb/gdp, sts/gdp, tc/gdp eds/gdp, ba/gdp, cms/gdp)……… ………….1 infr = β0 + β1tb/gdp + β2cp/gdp + β3tc/gdp + β4eds/gdp + β5cbnsf/gdp + β6cms/gdp + μ…………2 where: rgdp/gdp = real gross domestic product tb/gdp = percentage of treasury bills to gross domestic product sts/gdp = percentage of stabilization security to gross domestic product tc/gdp = percentage of treasury certificate to gross domestic product eds/gdp = percentage of eligible development stocks to gross domestic product cbnsf/gdp = percentage of central bank of nigeria intervention fund to gross domestic product cms/gdp = percentage of call money scheme to gross domestic product μ = error term unit root test most of time series have unit root as demonstrated by many studies including nelson and plosser (1982), stock and watson (1988) and campbell and peron (1991). therefore, their means of variance of such time series are not independent of time. conventional regression technique based on non-stationary time series produce spurious regression and statistic may simply indicate only correlated trends rather true relationship granger and newbold (1974). spurious regression can be detected in regression model by low durbin watson and relatively moderate r 2 . therefore, to distinguish between correlation that arises from share trend and one associated with an underlying causal relationship; we use both the augmented dickey fuller (dickey and fuller, 1979, 1981) test. thus, the limitation of the adf statistics in deciding whether  = 1 or  = 0.98, in a model like; ttt xx   1 ………………………………………………………….3 has been remedied by the application of the e-view statistic simultaneously. the null hypotheses for the adfstatistic test are h0. non stationary (unit root) and h0: stationary respectively cointegration to search for possible long run relationship amongst the variables, the study employs the johansen and juselius (1990) approach. thus, the study constructed a p-dimensional (4x1) vector auto regression model with gaussian errors that can be expressed by its first differenced error correction form as ttktkttt yyyyy    1112211 ..... ………………………….4 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 8 where yt are the data series studied, t is i. i. d, n(0,∑) i + -1 + a1 + a1 + a2 + a3 + ……. + ai for i = 1,2,3……..,k-1, п = i – a1 – a2 ……-ak. the п matrix conveys information about the long term relationship among the yt variables studied. hence, testing the cointegration entails testing for the rank r of matrix п by examine whether the eigenvalues of п are significantly different from zero. johansen and juselius (1990) proposed two tests statistics to determine the number of cointegrating vectors (or the rank of п), namely the trace and the maximum eigen-value (-trace) is computed as; )1( 1   n rj jinttrace  …………………………………………………….5 the trace tests the null hypothesis that “at most” r cointegration vector, with “more than” r vectors being the alternative hypothesis. the maximum eigenvalue test is given as: )1( 1max  rtin  …………………………………………………..6 it tests the null hypothesis of r cointegrating vectors against the alternative hypothesis of r + 1 cointegration vectors. in the equation (3) and (4), is the sample size and  is the largest canonical correlation. granger causality in case we do not find any evidence for cointegration among the variables, the specification of the granger causality will be a vector auto regression (var) in the first difference form. however, if will find evidence of cointegration, there is the need to augment the granger-type causality test model with a one period lagged error term. this is a crucial step because as noted by engel and granger (1987).  xxyy n i at n i y ot      1 11 1 1 ………………………………......7 and t n i t y n i ot xyxyx      1 111 1  ……………………………..8 error correction model (ecm) co-integration is a prerequisite for the error correction mechanism. since co-integration has been established, it is pertinent to proceed to the error correction model. infr = β0 + β1tb/gdp + β2sts/gdp + β3tc/gdp + β4eds/gdp + β5cbsf/gdp + β6cms/gdp + β7ecm/infr + μ………9 ecm represents the error correction model table 1: presentation of short run regression result variable coefficient std. error t-statistic prob. tb_gdp 0.543244 1.421442 4.865412 0.0001 cp_gdp 3.556878 2.531214 3.745214 0.0002 sts_gdp 2.887624 4.564545 2.875142 0.0014 eds_gdp -5.815471 6.345174 0.541275 0.6854 cbnsf_gdp -0.613222 2.635112 0.205414 0.3514 cms_gdp 1.543164 7.865421 0.521421 0.3357 c 345.5114 247.6244 0.356214 0.1586 r-squared 0.742452 mean dependent var 13541451 adjusted rsquared 0.604214 s.d. dependent var 3512.352 s.e. of regression 6451.342 akaike info criterion 34.54245 sum squared resid 54120401 schwarz criterion 52.35411 log likelihood -365.5144 f-statistic 38.351224 durbin-watson stat 1.654335 prob(f-statistic) 0.000000 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 9 the estimated regression result revealed the relationship between the independent variables and the dependent variable. the coefficient of determination (r 2 ) shows that only 74.2% variation in nigerian inflation rate can be explained by variation in the independent variables formulated in the model. f-statistics indicates the significant relationship between the dependent and the independent variables. this means the null hypothesis is rejected while the alternate accepted that there is significant relationship between the dependent and the independent variables. the durbin watson statistics proved that there is negative serial auto correlation. the t-statistics and the probability value revealed that all the variables are statistically not significant in inducing change to the dependent variable. table 2: presentation of adf unit root test result variables adf statistics critical value at 5% at 1% order of integration infr -3.017 -2.959 -3.657 1(1) tb_gdp 0.095 -2.959 -3.657 1(0) sts_gdp -2.101 -2.959 -3.657 1(1) tc_gdp -3.272 -2.959 -3.657 1(1) eds_gdp -0.562 -2.959 -3.657 1(1) cbnsf_gdp 3.435 -2.959 -3.657 1(1) cms_gdp 0.122 -2.959 -3.657 1(0) source: e-view windows 7.0 unit root test the analysis begins with the test of stationarity of the data (unit root) using the adf. the results are presented in the table above. all the variables, except tb/gdp and cms/gdp are stationary at level in the adf test. note that variables that are stationary at level are both stationary without and with trend. table 3: cointegration test series: infr tb_gdp sts_gdp tc_gdp eds_gdp cbnsf_gdp cms_gdp lags interval: 1 to 1 likelihood 5 percent 1 percent hypothesized eigenvalue ratio critical value critical value no. of ce(s) 0.521141 301.3543 540.35 654.21 none ** 0.354125 20.34251 24.25 354.54 at most 1 * 0.854534 16.35414 65.54 54.45 at most 2 0.385415 12.35421 35.52 21.44 at most 3 0.814241 65.54311 21.44 47.14 at most 4 0.832423 4.354514 24.63 54.34 at most 5 0.354534 5.545715 7.31 5.25 at most 6 table 4: normalized cointegrating coefficients infr tb_gdp sts_g dp tc_gd p eds_g dp cbnsf_g dp cms_g dp c_gd p 1.000000 -4.283838 2.84751 0 5.19126 1 2.901261 1.563292 3.921647 98.201 7 (0.43558) (2.1293 3) (1.4462 1) (0.13216 ) (0.10377) (1.28173) log likelihoo d -910.471 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 10 to test the long run relationship among the variables the study utilizes the johansen and juselius (1990) maximum likelihood procedure. the results are reported in the tables above. from the tables there appears to exist a long–run relationship commercial paper and banker’s acceptance while other variables have negative long run relationship. table 5: vector error correction model infr tb_gdp cp_gdp tc_gdp eds_gdp ba_gdp cms_gdp infr(-1) -1.545544 687.9352 119.1418 -1.498511 -18.78371 59.37980 0.871574 (4.6854) (282.884) (33.7260) (1.55973) (38.7242) (19.3503) (13.8316) (-4.23341) (2.43187) (3.53264) (-0.96075) (-0.48506) (3.06868) (0.06301) infr(-2) -3.141347 543.351 186.0949 7.479776 -26.31535 45.11844 2.273147 (0.346547) (227574) (27.1593) (1.25604) (31.1842) (15.5826) (11.1385) (-2.42114) (2.30411) (6.85199) (5.95507) (-0.84387) (2.89544) (0.20408) c 5411.654 -853241.0 -23042.6 -1541.412 41531.00 -5421.15 -4102.521 (654.854) (254101.) (74521.4) (964.404) (52101.4) (51021.4) (1428.01) (6.85212) (-2.85421) (-1.21101) (-2.42551) (1.12010) (-4.32212) (-0.12714) r-squared 0.993436 0.993733 0.999644 0.999565 0.999950 0.992064 0.999102 adj. r-squared 0.978119 0.979111 0.998814 0.998551 0.999832 0.973548 0.997007 sum sq. resids 145627.0 2.14e+10 3.04e+08 649455.5 4.00e+08 99959781 51073690 s.e. equation 155.7921 59670.17 7114.021 329.0024 8168.303 4081.662 2917.581 f-statistic 64.86102 67.95922 1204.606 985.1656 8491.881 53.57711 476.8129 log likelihood -122.6627 -247.5720 -202.9100 -138.3611 -205.8120 -191.2431 -184.1924 akaike aic 13.11073 25.00686 20.75333 14.60582 21.02972 19.64220 18.97071 schwarz sc 13.85682 25.75295 21.49942 15.35190 21.77581 20.38829 19.71679 mean dependent 768.4071 400084.6 140853.9 2002.462 394836.7 32671.29 28131.15 s.d. dependent 1053.213 412853.2 206616.0 8641.660 629787.1 25096.07 53326.26 determinant residual covariance 0.000000 the objective of the vector error correction is to examine the speed of adjustment in case of shocks. from the above, the tb_gdp model has a good speed of adjustment. table 6: presentation of granger causality null hypothesis: obs f-statistic probability tb_gdp does not granger cause infr 32 0.54210 0.42102 infr does not granger cause tb_gdp 4.45754 0.45320 cp_gdp does not granger cause infr 32 0.85441 0.45114 infr does not granger cause cp_gdp 14.740 1.9e-75 sts_gdp does not granger cause infr 32 0.01191 0.14870 infr does not granger cause sts_gdp 814.041 0.37541 eds_gdp does not granger cause infr 32 0.04471 0.75211 infr does not granger cause eds_gdp 2.41524 0.54577 cbnsf_gdp does not granger cause infr 32 7.91014 0.45744 infr does not granger cause cbnsf_gdp 4.54201 0.27745 cms_gdp does not granger cause infr 32 0.52411 0.45757 infr does not granger cause cms_gdp 0.52111 0.66451 the result of the granger causality test above shows a multivariate relationship running through the variables. 4. discussion of findings the money market is a market for source and investment of liquid financial instruments required to meet liquidity needs of individual and corporate organizations. the objective of this study is to investigate the effectiveness of money market instruments in inflation. it is expected from theory, principle and empirical findings that effective monetary policy management through various instruments will enhance the ability to control inflation in an economy. however, findings of this study revealed that nigerian money market instrument is statistically www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 11 significant to the inflation. the regression result indicates that tb_gdp, sts_gdp cbsf_gdp have positive and significant relationship. the insignificant relationship can be traced to shocks in the system and the ineffectiveness of the money market. however, tc_gdp, eds_gdp and cms_gdp have negative relationship which is contrary to the expectation of the result and the theory of monetary policy. the negative relationship can also be traced to the marginal performance of the money market. the long run cointegration result indicate that tb_gdp,tc_gdp,eds_gdp and cms_gdp have negative long run relationship, this shows that there is bivarite relationship running through the variables. 5. conclusion and recommendation this study attempts to explore the link between money market instrument and nigerian inflation rate. the study examines the relationship between money market instruments and inflation rate variable by analyzing their long run properties and short run dynamics. the econometric results from the error correction mechanisms show that money market instrument has significant relationship on inflation rate in nigeria. the negative signs of the coefficients of the money market instruments imply that the tb_gdp, cp_gdp, cbnsf_gdp is not enough to raise the inflation to the desired level. in all, the study reinstates that the literature on money and finance is quite vocal on the role of the supply of financial assets on the economy. if the money market is well structured and effectively functioning, the macroeconomic goals of the economy are likely to be achieved effectively and efficiently. from the above, the study concludes that the nigerian money market and its instrument are effective in controlling the inflation. from the above, the study makes the following recommendations; 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(2005). financial liberalization in nigeria: an assessment of relative impact; paper presented at the nigerian economic society, 6 (8), 20-37 onwioduokit, e., (2007). financial sector development and economic growth in nigeria. paper presented at the nigerian economic society,7 (9),71-96. raddatz, c., (2006). liquidity needs and vulnerability to financial underdevelopment. journal of financial economics, 80(3), 677-722. rajan, r.g., and l., zingales, (2003). saving capitalism from the capitalist. new york: random house. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 13 saibu, m. o., wakeel, a. i., & nwosu, p. i.., (2009). energy prices and macroeconomic performance 6 (8), .1-10. senbet, l.w., & otchere, i., (2005). financial sector reforms in africa: perspectives on issues and policies. annual world bank conference on development economics (abcde), dakar, senegal. pp. 1-61. shan, j. z., & morris, a., (2002). does financial development ‘lead economic growth? international review of applied economics, 16(2), 153–168. umeredu, c., (2007). liquidity shocks and asset price boom/bust circles. ecb working paper, 732. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) copyright © cc-by-nc 2019, cribfb | asfbr asian finance & banking review; vol. 3, no. 2; 2019 issn 2576-1161 e-issn 2576-1188 published by centre for research on islamic banking & finance and business, usa 26 leverage and corporate financial distress in nigeria: a panel data analysis lucky anyike lucky department of banking and finance rivers state university, port harcourt, nigeria email: lucky.anyike@yahoo.com agilebu ogechi michael department of banking and finance rivers state university, port harcourt, nigeria email: ogeberth2003@gmail.com abstract this study examined the effect leverage on corporate financial distress of quoted manufacturing firms in nigeria. the objective is to examine if financial leverage have any effect on financial distress of the nigeria firms. cross sectional data was sourced from financial statement of ten quoted manufacturing firms. z-score and changes in operating profits was proxy for corporate financial distress while debt equity ratio, short, long term debt and total debt to total assets were proxy for leverage. after cross examination of the validity of the pooled effect, fixed effect and the random effect, the study accepts the fixed effect model. findings reveal that financial leverage have positive effect on financial distress measured by the z-score while total debt ratio and debt equity ratio have positive effect on financial distress measured by changes on operating profits while short term debt and long term debt have negative effect on operating profits. from the regression summary, the study concludes that leverage have significant effect on corporate financial distress. we recommend that financial structure of the manufacturing firms ought to be adequately planned to safeguard the interest of the equity holders, shareholders and financial requirements of the firm and the firms should formulate policies of increasing its equity capital as oppose to debt and that implementable investment policies should be formulated and the business environment should be well examined. recognizing faults of investment might be paramount to develop the business’s financial performance, since it specifies the loopholes which corrective decision can be applied. keywords: leverage, corporate financial distress, nigeria, panel data analysis. 1. introduction traditional views of the causes of financial distress, which have over time been partially confirmed by empirical results, provide some evidence that financial distress arises in many cases from endogenous risk factors, such as mismanagement, high leverage and a non-efficient operating structure in place. the correlation of these factors and financial distress is, according to capital market theory, of unsystematic nature (celli, m. (2015). the term financial distress is used in a negative connotation in order to describe the financial situation of a company confronted with a temporary lack of liquidity and with the difficulties that ensue in fulfilling financial obligations on schedule and to the full extent. very often, financial distress is determined in terms of failure, default, bankruptcy, or distressed restructuring, dependent on the underlying methodology and the objectives of the overall research. corporate organizations have financial goals and strategy which are the expression of a corporate mission and strategy that are determined by the long-term planning system as a trade-off between conflicting and competing interests. corporate objective relates to four corporate fundamental goals of maximizing corporate profitability, maximizing returns on investment, maximizing corporate growth and availability of fund (pandey, 2005). the financial leverage degree is increased by increasing use of external financing sources, and financial leverage can be increased by non-traditional financial instruments, such as the use of financial options and futures contracts. (fahmi.2008). some consider financial leverage as one if the terms invented by institutional mental for packaging undesired or negative things or to give a nice appearance, instead of saying borrowing or indebtedness which is a term that inspires risk and weakness (nibal, qasaba, 2010).the preliminary review of the theory and empiricism has highlighted that the analysis of financial distress from the capital market perspective produces more questions than it is capable of answering (celli, 2015). default risk embedded in the context of the traditional portfolio theory does not capture its specific attributes associated with financial distress and, copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 27 consequently, provides incorrect information in the case of the valuation of distressed companies. rare empirical studies account for distress risk and show a negative deviation in value of up to 36% in comparison to the value estimated according to classic portfolio theory and the capm. theoretically, m&m indicate that companies can maximize their value by employing more debt due to tax shield benefits allied with the use of debt. firms benefit from taking on more leverage. m&m show that firm value and firm performance is an increasing function of leverage due to the tax deductibility of the interest payments at the corporate level (modigliani & miller, 1963). in reality, markets are inefficient, due to taxes, information asymmetry, transaction costs, bankruptcy costs, agency conflicts and any other imperfect elements. the static trade-off theory by kraus and litzenberger (1973) opined that the static trade-off theory assumes that firm’s trade-off the benefits and costs of debt and equity financing and find an optimal capital structure after accounting for market imperfections such as taxes, bankruptcy costs and agency costs. the theory stated that there is a benefit to financing with debt, specifically the tax benefit. however there is also a cost of financing with debt, namely the indirect bankruptcy costs and the more direct financial distress costs of debt. the theories are appealing but failed to explain the issue of financial distress in a developing financial market like nigeria. lucky (2017) have considered the classical assumption of perfect market as an irony. while factors that determine financial distress has well been studied (celli, 2015). the effect of financial leverage on corporate financial distress in nigeria is scanty. this study therefore examined the effect of leverage on corporate financial distress of quoted nigeria manufacturing firms. 2. literature review 2.1 conceptual review financial distress is defined as the inability of a firm to pay its financial obligations as they mature beaver (1966) was one of the first researchers to point out that financial distress can have different forms of appearance. dependent on the type of the event occurring, bankruptcy, bond default, an overdrawn bank account, or nonpayment of a preferred stock dividend can represent the operational form of financial distress. similar definitions of financial distress can be found in andrade and kaplan (1998), baldwin and mason (1983), and brown, james and mooradian (1992). these authors interpret financial distress as a crucial event whose occurrences separates the time of a company’s financial health from the period of financial illness and requires undertaking corrective actions in order to overcome the troubled situation. andrade and kaplan (1998) identify two forms of financial distress: the first one is default on a debt payment, and the second one is an attempt to restructure the debt in order to prevent the de-fault situation. brown, james and mooradian (1992) classify a company as financially distressed if it is going to implement restructuring measures with the purpose to avoid a default or as a response to the anticipated default on a debt contract. opler and titman (1994) defined financial distress more broadly as a costly event that affects the relationship to debt holders and non-financial stakeholders. as a consequence, a company gains an impaired access to new capital and bears the increasing costs of maintaining this stricken relationship. gestel et al. (2006) characterize financial distress and failure as the result of chronic losses which cause a disproportionate increase in liabilities accompanied by shrinkage in the asset value. hendel (1996) gives a probabilistic definition of financial distress as “the likelihood of bankruptcy, which depends on the level of liquid assets as well as on credit availability. the development of the theory of financial distress as a process having specific dynamics began with an article by gordon (1971). gordon highlights that financial distress is only one state of the process, followed by failure and restructuring, and should be defined in terms of financial structure and security valuation. the corporation enters this state when its power to generate earnings is becoming weak and the amount of debt exceeds the value of the company’s total assets. financial distress is characterized by yields of bonds lower than the risk free interest rate and significant difficulties in obtaining additional external financing. 2.2 financial leverage financial leverage is a measure of how much firm uses equity and debt to finance its assets. as debt increases, financial leverage increases. management tends to prefer equity financing over debt since it carries less risk (matt, 2000). financial leverage takes the form of a loan or other borrowing (debt), the proceeds of which are re-invested with the intent to earn a greater rate of return than cost of interest. an unlevered firm is an all-equity firm, whereas a levered firm is made up of ownership equity and debt (andy, chuck & alison, 2002). leverage allows a greater potential returns to the investor than otherwise would have been available, but the potential loss is also greater if the investment becomes worthless, the loan principal and all accrued interest on the loan still need to be repaid (andy et. al., 2002). pandey (2010) opined that the financial leverage employed by a company is intended to earn more return on the fixedcharge funds than their costs. the surplus (or deficit) will increase (or decrease) the return on the owners’ equity. the rate of return on the owners’ equity is levered above or below the rate of return on total assets. thus, financial leverage is considered as a double-edged sword because it provides the potentials of increasing the shareholders’ earnings as well as creating the risks of loss to them. copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 28 2.3 measures of financial leverage 2.3.1 total debt ratio total debt ratio measures the amount of a firm’s total assets that is financed with external debt. this measure encompasses a ll short term liabilities and long-term liabilities. nwude (2003) contend that this measures portion of the firm’s assets that is financed by creditors. as the total debt ratio increase, so do a firm’s fixed-interest charges, if the total debt ratio becomes too high, the cash flow the firm generates during economic recessions may not be sufficient to meet interest payments. in terms of its significance to a firm, theoretical literatures predict that debt is positively correlated with level of investment. for example, long and malitz (1985) found a significant positive relationship between the rate of investment in fixed plant and equipment and level of borrowing. the total debt ratio is measured by dividing total debt with the total assets of the firm. this proxy variable remained most notable measure of leverage ratio of a firm as adopted in many empirical studies (zeitun and tian, 2007; onaolapo and kajola, 2010; tze-sam and heng, 2011; kasozi and ngwenya, 2010; baker and wurgler, 2002; ju et al., 2004; and booth et al., 1999; khan, 2012; azhagaiah and gavoury, 2011). total debt ratio = total assets total debt 1 2.3.2 debt equity ratio debt equity ratio is similar to the debt ratio and relates the amount of a firm’s debt financing to the amount of equity financing. actually, this measure of leverage ratio is not actually a new measure; it is simply the debt ratio in a different format. debt equity ratio is the quantitative measures of the proportion of the total debt to residual owners’ equity (nwude, 2003). thus, it is an indicator of company’s financial structure and whether the company is more reliant on borrowing (debt) or shareholders capita l (equity) to fund assets and activities. many empirical studies in different jurisdictions have employed this measure of financial structure in their various studies (zeitun and tian, 2007; majumdar and chhibber, 1999; azhagaiah and gavoury, 2011) among others. debt equity ratio = shareholders funds total debt 2 2.3.3 long term debt ratio although this measure is incorporated in the last two measures highlighted above, some analysts generally use this measure because most interest costs are incurred on long-term borrowed funds, and because long-term borrowing places multi-year, fixed financial obligations on a firm. titman and wessels (1988) contend that significant results are good reason for employment of different measures of leverage ratio because some of the theories of financial structure have different implications for not combining them as aggregate “debt ratio”. long term debt ratio is measured by dividing long term debt with the total assets of the firm, and has been adopted in several empirical studies (titman and wessels, 1988; zeitun and tian, 2007; tze-sam and heng, 2011; long and malitz, 1985; booth et al., 1999). long term debt ratio = total assets long term debt 3 2.3.4 short term debt ratio short term debts are debt obligations that mature within one accounting year. this measure is very appropriate to be included in the measures of leverage ratio due to the important of short term funding to a firm. this may be one of the reasons that led to adoption of different measures of leverage ratio rather than narrow measure of financial structure by some scholars. titman and wessels (1988) contend that theories have different empirical implications in regard to different types of debt instruments. thus, mismatching funds is a situation when long term investments are financed by short term debt rather than long term debt. apparently, the occurrence of this is prone to default as payment of interest and repayment of principal may fall due when the proceeds (cash inflow) from the investment are not readily available. the inability of the firm to repay the principal will expose it to the embarrassments resulting from legal actions. this measure however, indicates the magnitude of current liabilities (obligations) to changes in the value of overall assets of a firm. schinasi (2000) contends that leverage is the magnification of the rate of return whether positive or negative on a position or investment beyond the rate obtained by a direct investment of own funds in the market. theoretically, it is argued that short term measure is a good measure of leverage ratio in transition economy with less developed debt market where most firms’ external debt finance are majorly commercial bank loans. lucey and zhang (2011) are of the view that market liberalization at the country level decreases the use of long-term debt, and debt maturity shifts to short term. empirical investigation by khan (2012) revealed that engineering sector firms in pakistan are largely dependent on short debt but debts are attached with strong covenants which affect the performance of the firm. a good number of authors have copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 29 employed this measure in their empirical studies (timan and wessels, 1988; zeitun and tian, 2007; long and malitz, 1995; khan, 2012) among others. this is measured thus; short term debt = total assets short term debt 4 2.4 theoretical review 2.4.1 modigliani-miller hypothesis the origin of the early literature on the relationship between bankruptcy and corporate capital structure decisions can be found in the seminal work of modigliani and miller (1958, 1963). their initial analysis establishes that, in perfect and frictionless capital markets, firm value is unaffected by financial policy. the original proof of the celebrated modigliani-miller (mm) theorem is predicated on the assumption of riskless debt. the theorem was later generalized by stiglitz (1974) and others who argue that, in perfect and frictionless markets, the irrelevance of corporate financial policy extends beyond the issuance of riskless debt and equity securities to other forms of securities, including risky debt, preferred stock, and all kinds of hybrid securities. the theorem holds in both a single-period framework and a multi-period framework so that firm value is also independent of debt maturity structure decisions. the corollary of the mm theorem is that corporate bankruptcy is inconsequential to firm value, since the investment decisions are completely separable from the financing decisions. in the perfect and frictionless mm world, the amount of corporate indebtedness has no effect on the value of the firm’s assets or on the risk of the total cash flow stream generated by the firm’s assets. the capital structure of the firm simply determines how the total cash flow is partitioned between equity holders and debt holders and thus the risk borne by each class of capital providers. bankruptcy is essentially a transfer of ownership from equity holders to debt holders when the value of assets drops below the value of debt. the complete separation between financing decisions and investment decisions implies that there is no necessary linkage between bankruptcy and the firm’s operating performance. bankruptcy does not cause economic distress or poor economic performance. the crucial consideration is whether an identical but otherwise not financially distressed firm (due to low financial leverage) would face similar deterioration in its operating performance. it is also worthwhile to note that financial distress is distinct from financial constraint. confusion about the two may arise because financially distressed firms are usually also financially constrained. financial constraint refers to a case when it is costly or even impossible for the firm to access external financing due to reasons such as asymmetric information, intangibility of assets, and risk. in fact, the firm can be financially constrained even without any debt on its balance sheet. thus, a financially constrained firm is not necessarily financially distressed. moreover, liquidation and bankruptcy are often discussed in the literature as though they are related. liquidation is the process of dismantling the firm’s assets and selling them (either piecemeal or in their entirety) to new management teams . liquidation is optimal when the value of the firm’s existing resources is higher in alternative uses. hence liquidation should be viewed as a capital budgeting decision that is independent of the way in which the firm is financed. liquidation and bankruptcy are separate, independent events (haugen and senbet (1978) for further discussion on this issue). 2.4.2 capital structure theory the tradeoff theory if corporate bankruptcy is costly and then it fills an important void between the corner result of the modigliani-miller tax-adjusted model and the observed limitations on the amount of debt financing employed in practice. although corporate capital structure decision is not the primary subject of this paper, it is appropriate to highlight what has come to be known as the ‘trade-off theory’ of capital structure. modigliani and miller (1963) argue that the tax code favors debt over equity financing by allowing the firm’s interest expense to be deducted from gross income for corporate tax purposes, but disallowing deductibility of payments to equity holders ( dividends are not tax deductible on the personal account). since an additional dollar of debt generates the marginal benefit of a tax deduction without any offsetting cost in this framework, the firm value is maximized by utilizing as much debt as possible to finance corporate investment decisions. leland (1994) develops a unified analytical framework with closed-form solutions to understand the value of corporate debt and optimal capital structure. leland’s model is rich enough to permit a detailed analysis of the behavior of corporate bond prices and optimal leverage ratios as corporate tax rates, bankruptcy costs, firm asset value, firm risk, and riskfree interest rate change. in leland’s framework bankruptcy can either be determined endogenously as the result of an optima l decision by equity holders or be triggered by the violation of a positive net-worth covenant. the author shows that the tradeoff between the tax benefit of debt and the bankruptcy costs determines the value of corporate bond, the bond yield, the optimal leverage ratio, and the optimal timing of bankruptcy. leland’s model also provides important insights about the tradeoff between the tax benefit of debt and the agency cost of debt. when the firm is in the vicinity of financial distress and bankruptcy, equity holders have incentives to increase the firm’s risk through asset substitution, which transfers wealth from bondholders to equity holders. corporate bonds with positive net-worth covenants (or short-term rollover debt financing) tend to mitigate this agency problem, because stockholders cannot gain by increasing firm risk when debt is protected by the covenant. thus, protected debt copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 30 may be the preferred form of financing for firms that are more exposed to the agency cost of debt, despite having lower potential tax benefits. 2.4.3 information asymmetry asymmetric information exists in any transaction where one party knows more about the true value of the asset than does another party. in corporate finance, corporate managers are typically assumed to possess private information about the true economic value of the firm. in the case of financially distressed firms, corporate insiders and outside investors may simply disagree about the true value of the firm because they have different information. insiders may also have an incentive to intentionally misrepresent the firm value in order to convince bondholders to agree to exchange their existing claims for lower valued securities. the asymmetric information problem suggests that a greater proportion of the securities offered in a distressed exchange offer should contain contingent payment features. the reason is that the future values of contingent payment securities will adjust more readily to the revelation of information about the true value of the firm. 2.5 empirical review gennaioli and rossi (2011) showed that judicial biases may not be random, because career concerns of bankruptcy judges induce a pro-debtor bias. judges would over-reorganize bankrupt firms to establish a pro-debtor reputation so as to attract future bankruptcy filings (by debtors). the authors show that strong creditor protection in reorganization is crucial to improve judicial incentives to resolve financial distress efficiently. lubben (2000) used a sample of 22 firms from 1994 and calculates that the cost of legal counsel in chapter 11 bankruptcy is on average about 1.8% of the distressed firm’s total assets, and can be as high as 5%. altman and hotchkiss (2006) provide a nice summary of the estimates of the direct bankruptcy costs in the literature. the findings in all these studies suggest that direct bankruptcy costs are unlikely to represent a significant determinant of the firm’s capital structure decision. gilson, john and lang (1990) provided extensive evidence on the incentives of financially distressed firms to choose between private debt restructurings and formal bankruptcy proceedings. their sample consists of 169 distress reorganizations during 1978–1987. they find that a private workout is more likely when the distressed firm has fewer distinct classes of debt outstanding and the firm relies more heavily on bank debt than public debt, both of which indicate a less severe holdout problem and less information asymmetry. private reorganization is also more likely when a greater proportion of the firm’s assets are intangible. for such a firm, failure to renegotiate the firm’s impaired credit obligations will result in substantial destruction of going concern firm value. this creates a strong incentive for different classes of creditors to reach agreement and avoid costly bankruptcy reorganization. their findings suggest that asset and financial characteristics jointly affect the firm’s choice between these alternative reorganization mechanisms. eberhart et al.(1990) examined the relationship between share price reactions and subsequent apr violations, and find that the equity markets generally anticipate and price these deviations. garlappi, shu, and yan (2008) showed that shareholder advantage, in violation of the apr, can explain the cross-section of equity returns. for firms with strong shareholder advantage (e.g., those subject to large magnitudes of apr violations), a higher probability of default can be associated with a lower expected equity return. this is because in the presence of 37 shareholder advantage, default probability does not adequately represent the risk of default to equity holders. bharath, panchapegesan, and werner (2010) documented a secular decline in the frequency of apr violations from 64% before 1990 to 26% in the 1990s, and to about 9% in the 2000─2005 period. the average value received by equity holders in the apr violations also declines from 3.6% before 1990 to 0.6% in the 1990s and to 0.44% in the 2000s. at the same time, management turnover is observed in about 38% of the cases, a 65% increase from the level before 1990. ayotte and morrison (2009) examined 153 bankruptcy filings by both private and public companies in the latter half of 2001. the authors also find that apr violations are rare, occurring in only 8% of the cases. in 82% of the confirmed reorganization plans, equity holders receive nothing. if apr violations mainly result from the debtor-friendly features of the bankruptcy code, then the substantial decrease in the frequency and magnitude of apr violations in the last two decades should reflect growing power of creditors in the us corporate bankruptcies. dahiya et al. (2003) found that firms, that obtain dip financing, are more likely to emerge from bankruptcy than firms that do not. they also take a shorter time to resolve their bankruptcy filing. these findings are even more pronounced if the dip lenders are well informed about the debtor through prior lending relationship. these results are consistent with both a screening role and a monitoring role played by dip lenders. skeel (2004) argued that the control and governance by dip lenders is achieved mainly through the lenders’ influence over managerial personnel in the distressed debtor, and the active use of affirmative and negative covenants in the loan agreement. dip lenders can insist on changing the management of the distressed debtor at the outset of the loan. several studies find evidence of a sharp increase in ceo turnover in recent bankruptcy reorganizations. copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 31 bharath et al. (2010) found that management turnover is observed in 38% of the cases after 2000, a 65% increase from the level before 1990. the turnover rate is significant even among bernstein (2006) finds that 48% of the bankrupt firms in his sample experience ceo turnover within two years of the filing. ayotte and morrisen (2009) found that 70% of ceos in their sample are replaced within two years of the bankruptcy filing. all these studies suggest that no longer provides a safe harbor for entrenched managers. dip lenders do exert control and governance in the distressed firms by pressing for a change in the management. a dip loan is generally structured as a revolving credit agreement with short maturity (the median loan maturity is 1.5 years) and strict conditions on each new round of financing. this loan structure gives the lender significant leverage over the debtor’s decision-making throughout the reorganization process. altman (2000) amended z-score model to develop zeta model for appraising bankruptcy risk of firms. it is based on data more relevant to current conditions and to a larger number of industrial firms. the potential applications of the zeta bankruptcy identification model are to assure credit worthiness of firms for financial and non-financial institutions, identification of undesirable investment risk for portfolio managers and individual investors and to aid in more effective internal and external audits of firms with respect to going-concern considerations, among others. grice et al; (2001) seeks to validate the application of z-score model current scenario. they tested the model for predicting bankruptcy of non-manufacturing firms as it was originally developed for manufacturing firms. they also examined whether the model was useful for predicting financial stress other than bankruptcy. they established the fact that the model was more subtle in estimating bankruptcy of manufacturing firms com-pared to non-manufacturing firms. also the model was insensitive to predict other forms of distress. platt et al; (2002) analyzed automotive supplier industry and suggested that the early warning model successfully discriminated between distressed firms and healthy firms. they claimed that model should include all firms within a population; otherwise it could result in choice-based sample bias.chava et al; (2004) paper scrutinized the dominance of shumway’s model (2001) over altman’s model (1968) and zmijewski’s in forecasting bankruptcy by collecting extensive data. they substantiate the fact that industry groupings will remarkably influence the bankruptcy risk rate in the model. kwak et.al. (2005) employed data mining technique called multiple criteria linear programming (mclp) to identify the bankrupt firms. the outcome was com-pared with altman’s multi discriminant model and ohlson’s logit model. they claim that mclp model has superior prediction rate than altman model and similar result as ohlson’s model.dawkins et al., (2007) analysed the fluctuations in share price after firm has filled bankruptcy. they employed event study methodology and controlled firms’ financial condition by using altman’s z-score model. it was observed that there was increase in share price even when firm filed bankruptcy because of prevailing bull market conditions. huge transactions were commanded by large trader’s postbankruptcy filing as investors were abnormally optimistic. fich et al; (2008) investigated the association between firm’s governance practices and capability to avoid bankruptcy. they predicted the bankruptcy of firms using altman’s z-score model along with interest coverage ratio. it was found that during firm distress situation bad governance will misrepresent accounting information and will not have ability to handle the situation. this often occurs if they are independent boards than inside directors. agarwal et al; (2008) compared the accuracy of predicting bankruptcy using market base model with accounting zscore model. it was found that neither of the models had adequate information for predicting failure as they were unique. however, it was concluded that accounting based models account for credit risk since accounting statements capture performance for several years. shen, et al; (2010) compares logit model with robust logit developed based on altman’s z-score. they found robust logit model was superior even when the sample included statistical outliers (firms that are doing extremely good or bad). however, robust logit model was vigorously allocating firms as default. ray (2011) evaluates financial health of automobile industry during from 2003 to 2010 in india using z-score model. the multiple discriminant frameworks has depicted moderate picture. the z-score lies within “grey zone” suggesting credit risk associated with the industry. the study indicates alarming situation where z score is declining after global recession hits indian economy (2007). chen et al., (2012) analyzed the effect of pricing of corporate debt due to “unionized workers” in financially distressed and healthy firms. they employed five different indicators including altman’s z-score model to identify if firm is in distress. using all five alternative models of distress, it was found that “unionized workers” and distress has negative relation which is statistically significant. this is because labour unions try to shield creditor’s wealth even though they support firm policy to reduce creditors’ wealth during distress. singhal et al; (2013) examined the relationship between bankruptcy and diversification strategy of firms. altman zscore used to represent the likelihood of bankruptcy which is highly correlated with leverage. it was found that focused firms are more likely to go bankrupt than diversified firms. li (2014) explored the application of altman’s bankruptcy model in construction industry. the origi-nal five set variable is expanded to 14 set variable. the conclusion drawn is that altman’s model stands both valid and effective in context of bankruptcy prediction for sample selected. celli (2015) found that the z-score degree of reliability is relatively high and still copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 32 works quite adequately in predicting listed industrial company failure in italy. it proved a precious tool in the detection of company operating and financial difficulties up to 3 years before the default. altman et al. (2016) re-examined the original version of the z-score model using data of different countries. they reestimated values using another statistical method and additional variables to assess the effect of classification performance when the data are heterogeneous. the evidence indicates that the original z-score model executes well at an international context till date. the conclusion from the review is that although the z-score model was developed nearly five decades ago and many alternative failure prediction models exist, the z-score model continues to be used worldwide as a main or supporting tool for bankruptcy or financial distress prediction and analysis; both in research and in practice. this paper focuses on accounting-based versions of the z-score models, which even though they are occasionally outperformed by other models, do not rely on market data. 3. research methodology descriptive and longitudinal design was employed with a view to making statistical inferences on the effect leverage on corporate financial distress of manufacturing firms. a sampling frame of 15 quoted manufacturing firms was selected using random sampling techniques. the required cross-sectional data were sourced from annual reports of the firms and stock exchange fact book from 2008-2017. 3.1 analytical framework and empirical model specification this analysis is carried out within a panel data estimation framework. the preference of this estimation method is not only because it enables a cross-sectional time series analysis which usually makes provision for broader set of data points, but also because of its ability to control for heterogeneity and endogencity issues. hence panel data estimation allows for the control of individual-specific effects usually unobservable which may be correlated with other explanatory variables included in the specification of the relationship between dependent and explanatory variables (hausman and taylor, 1981). the basic framework for panel data regression takes the form: where: y = dependent variable d = independent variable o = intercept i = coefficient of the explanatory variable e = error term i = cross-sectional variable t = time series variable in the equation above, the heterogeneity or individual effect is iz which may represent a constant term and a set of observable and unobservable variables. when the individual effect iz , contains only a constant term, ols estimation provides a consistent and efficient estimates of the underlying parameters (kyereboah-coleman, 2007); hut if iz , is un-observable and correlated with itx , then emerges the need to use other estimation method because ols will give rise to biased and inconsistent estimates. similarly for endogeneity issues, it is generally assumed that the explanatory variables located on the right hand side of the regression equation are statistically independent of the disturbance it such that the disturbance term it is assumed to be uncorrelated with columns of’ the parameters itx and itz as stated in equation (1), and has zero mean and constant variance  2 (hausman and taylor, 198). if this assumption is violated, then ols estimation will yield biased estimates of the underlying parameters of  (mayston, 2002).hence, endogeneitv problems arise when the explanatory variables are correlated with the disturbance term it (mayston, 2002; hausman and taylor, 1981). in order to circumvent these problems, panel estimation techniques of fixed and random effects will be adopted in this study, in addition to the traditional pooled regression estimation. decisions will be made between the fixed and random effect models using the hausman specification test. the panel model for the study is specified base on the modified model of lucky (2018). 5,, itiitit zxy   copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 33 3.2 model specification 3.2.1 pooled regression specification  ititiii tatdltdstdderoscorez 4332211 / µ 6  ititiii tatdltdstdderoop 4332211 / µ 7 3.2.2 fixed effect model specification itiiititiiit idumtatdltdstdderoscorez 11/ 9 4332211    8 911/ 9 4332211 itiiititiiit idumtatdltdstdderoop    3.2.3 random effect model specification 101/ 43322111 itititiiit itatdltdstdderoscorez   111/ 43322111 itititiiit itatdltdstdderoop   where z-score = altman z-score measure for financial distress δop = variation in operating profits of the manufacturing firms der = debt equity ratio std = short term debt ltd = long term debt td/ta = total debt to total assets µ = stochastic or disturbance/error term. t = time dimension of the variables α 0 = constant or intercept. 3.3 estimation techniques 3.3.1 panel unit root test result the data were checked for the presence of unit root using the adf fisher chi-square andphiliperon fisher chi-square, which is based on the well-known dickey–fuller procedure. the null hypothesis for these tests is that there is a presence of nonstationary series against the alternative hypothesis of stationary series. the unit root test is important because non-stationary series regression estimation leads to spurious regression estimations with the wrong magnitude and sign of the parameter of the regressors, with wrongly inferred implications. the study assumes an absence of a time trend; hence it is tested for stationarity allowing for constant only. stationarity denotes the non-existence of unit root. we shall therefore subject all the variables to unit root test using the augmented dickey fuller (adf) test specified in gujarati (2004) as follows. etyiyy t m i tt     1 1 121  12 where: ty = change time t 1 ty = the lagged value of the dependent variables t = white noise error term if in the above  =0, then we conclude that there is a unit root. otherwise there is no unit root, meaning that it is stationary. the choice of lag will be determined by akaike information criteria. 3.3.2 decision rule t-adf (absolute value) > t-adf (critical value) : reject ho (otherwise accept h1) note that each variable will have its own adf test value. if the variables are stationary at level, then they are integrated of order zero i.e 1(0). the unit root problem earlier mentioned can be explained using the model: copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 34 y= yt-1 + i 13 where yt is the variable in question; i is stochastic error term. equation (a) is termed first order regression because we regress the value y at time “t” on its value at time (t1). if the coefficient of yt-i is equal to 1, then we have a unit root problem (non stationary situation). this means that if the regression. y= yt-1 + i 14 is run and l is found to be equal to 1 then the variable yt has a unit root (random work in time series econometrics). if a time series has a unit root, the first difference of such time series are usually stationary. therefore to salve the problem, take the first difference of the time series. the first difference operation is shown in the following model: y= (l-1) yt-1 + i 15 yt-1 + i 16 (note:  =1-1= 0; where l =1; yt = yt yt-i) 17 integrated of order 1 or i(i) given that the original (random walk) series is differenced once and the differenced series becomes stationary, then the original series is said to be integrated of order i or i (1). integrated of order 2 or i (2) given that the original series is differenced twice before it becomes stationary (the first difference of the first difference), then the original series is integrated of order 2 or 1(2). therefore, given a time series has to be differenced q times before becoming stationary it said to be integrated of order q or i (q). hence, non stationary time series are those that are integrated of order 1 or greater. the null hypothesis for the unit root is: ho: a = 1; the alternative hypothesis is hi: a <1. we shall test the stationarity of our data using the adf test. 3.4 granger causality test thus, granger causality test helps in adequate specification of model. in granger causality, test, the null hypothesis is that no causality between two variables. the null hypotheses is rejected if the probability of f* statistics given in the granger causality result is less than 0.05. the pair-wise granger causality test is mathematically expressed as: 111 1 11 1 uxyxy t x n i t y n i ot        18 and 1 v 1y xxdp1 n 1i 1yt y 1 dp n 1i o dp t x        19 where xt and yt are the variables to be tested white ut and vt are the white noise disturbance terms. the null hypothesis 011  yy dp , for all i’s is tested against the alternative hypothesis 01 x and .01 ydp if the co-efficient of x 1 copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 35 are statistically significant but that of ydp1 are not, then x causes y. if the reverse is true then y causes x. however, where both co-efficient of x 1 and ydp1 are significant then causality is bi –directional 4. presentation of results and discussion of findings the following tables explain the dynamic relationship between leverage and corporate financial distress of the selected manufacturing firms in nigeria. table 1: presentation of level series result variable pooled effect fixed effect random effect model i β coefficient t. stat p. value β coefficient t. stat p. value β coefficient t. stat p. value td_ta -0.008645 -0.600153 0.5500 0.001555 0.131724 0.8956 -0.000197 -0.016947 0.9865 std -7.03e-05 -0.274588 0.7843 5.05e-05 0.248474 0.8045 3.06e-05 0.152246 0.8794 ltd 0.009995 0.656396 0.5133 0.004891 0.371851 0.7111 0.005817 0.453857 0.6511 der 0.022332 1.774702 0.0795 0.010815 1.092673 0.2782 0.012597 1.286643 0.2017 c 2.122728 2.088736 0.0397 2.434979 2.869577 0.0054 2.389538 2.798302 0.0064 r-squared 0.039020 0.571756 0.020576 adjr2 0.006202 0.463188 0.025515 f-sstatistic 0.862851 5.266306 0.446422 fprob 0.489742 0.000000 0.774709 d w 1.089989 1.834110 1.688446 model ii variable pooled effect fixed effect random effect β coefficient t. stat p. value β coefficient t. stat p. value β coefficient t. stat p. value td_ta 0.031223 2.073778 0.0417 0.031223 2.073778 0.0417 0.028239 1.935165 0.0563 std -0.004051 -0.202461 0.8401 -0.004051 -0.202461 0.8401 -0.007842 -0.421734 0.6743 ltd -0.000192 -0.619634 0.5375 -0.000192 -0.619634 0.5375 -0.000306 -1.025563 0.3080 der 0.011300 0.629176 0.5313 0.011300 0.629176 0.5313 -0.001072 -0.062732 0.9501 c 8.273092 6.409629 0.0000 8.273092 6.409629 0.0000 9.108714 7.432156 0.0000 r-squared 0.409636 0.409636 0.056943 adjr2 0.259967 0.259967 0.012564 f-statistic 2.736936 2.736936 1.283096 fprob 0.001357 0.001357 0.283076 d w 1.46930 1.469302 1.151925 source: extract from e-view 9.0, 2019 table 2: testing the significance of the models test: redundant chi –sq stat df prob cross-section f 6.308871 (14,71) 0.0000 cross-section chi-quare 72.743506 14 0.0000 test: hausman chi –sq stat df prob cross-section random 2.038175 4 0.0007 model ii cross-section f 3.021621 (14,71) 0.0011 cross-section chi-square 42.064478 14 0.0001 test: hausman chi –sq stat df prob copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 36 cross-section random 7.624983 4 0.1063 source: extract from e-view (9.0), 2019 in testing the validity of the models, the fixed effects on the cross section redundant fixed effectlikelihood ratio, the p value is 0.000 indicating that the effects are significant. select the random effect and perform the correlated random effects hausman test, testing the random effects model against the fixed effects model. the null hypothesis in that case is that both tests are consistent estimators and the random effects model is efficient. under the alternative hypothesis, only the fixed effect is consistent. since the pvalue is 0.000, the null hypothesis is rejected and, therefore, the fixed effects model is to be preferred. table3: test for stationarity variables adf fisher chi-square/ pp fisher chi-square statistics probability remark decision z-score pp fisher chi-square 67.3305 0.0001 stationary reject h0 pp choi z-stat -3.67792 0.0001 stationary reject h0 op pp fisher chi-square 73.4606 0.0000 stationary reject h0 pp choi z-stat -2.69812 0.0035 stationary reject h0 td_ta pp fisher chi-square 88.0559 0.0000 stationary reject h0 pp choi z-stat -5.30916 0.0000 stationary reject h0 std pp fisher chi-square 100.329 0.0000 stationary reject h0 pp choi z-stat -4.89214 0.0000 stationary reject h0 ltd pp fisher chi-square 67.2248 0.0001 stationary reject h0 pp choi z-stat -2.32101 0.0101 stationary reject h0 der pp fisher chi-square 92.7698 0.0000 stationary reject h0 pp choi z-stat -4.39812 0.0000 stationary reject h0 source: extract from e-view 9.0 the table above presents the summary results of the adf and pp panel unit root tests. the results show that the null hypotheses of a unit root test for first difference series for all the variables can be rejected at all the critical values indicating that the level series which is largely time-dependent and non-stationary can be made stationary at the first difference and maximum lag of one. thus, the reduced form model follows an integrating order of 1(1) process and is therefore a stationary process. it also reveals that the test of stationarity in the residuals from the level series regression is significant at all lags. furthermore, this indicates that the regression is no more spurious but real. that is to say, all the variables are individually stationary and stable. at this level, all the t-statistic became significant at 5 percent. table 4: test for stationarity null hypothesis: obs f-statistic prob. td_ta does not granger cause z_score 60 1.71074 0.1902 z_score does not granger cause td_ta 0.00783 0.9922 std does not granger cause z_score 60 3.28627 0.0449 z_score does not granger cause std 5.68099 0.0057 ltd does not granger cause z_score 60 1.05415 0.3554 z_score does not granger cause ltd 0.36213 0.6978 der does not granger cause z_score 60 2.97105 0.0595 z_score does not granger cause der 1.28828 0.2839 null hypothesis: obs f-statistic prob. der does not granger cause op 60 1.17250 0.3172 op does not granger cause der 3.31461 0.0437 ltd does not granger cause op 60 0.68677 0.5075 op does not granger cause ltd 0.36610 0.6951 std does not granger cause op 60 0.44158 0.6453 op does not granger cause std 1.12467 0.3321 td_ta does not granger cause op 60 5.54936 0.0064 op does not granger cause td_ta 0.35931 0.6998 source: extract from e-view 9.0 copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 37 5. discussion of findings the panel corrected standard error result shown in table 1 reveals that leverage affects corporate financial distress significantly. the result of the research could be linked to the high cost of debt financing in the country due to the high-interest rate charged on the borrowed fund. majority of the manufacturing firm utilizes bank loan in financing their operation which results in a high leverage; however, over-reliance on debt financing exposes the firms to financial distress. the result of the research findings corroborates with previous research work done by (umar et al., 2012; perinpanatham, 2014; vishnu et al., 2014; muigai and muriithi, 2017). the result further showed that the coefficient of all the leverage measures have positive effect on corporate financial distress of the selected manufacturing firms. this implies that increase in financial leverage will increase financial distress of the firms. this finding confirms the static trade-off theory. furthermore, the result showed that revenue growth affects corporate financial distress negatively. the implication of this is that firms with positive earnings growth employ less debt financing, hence they experience a lower level of financial distress (thim et al., 2011). the research is consistent with the trade-off theory which posits a positive relationship between leverage since tangible assets are easier to collateralize and they suffer less loss in value when firms go into distress (harc, 2015). the findings negate the research outcome of maina and ishmail, (2014) as well as muigai and muriithi (2017). the panel data estimates also showed from the second model that total debt to total assets and debt equity ratio have positive relationship with the operating profits of the selected manufacturing firms while short and long term debt have negative effect on operating profits of the firms. the durbin watson figure of 1.83 indicates that the model is free from autocorrelation. in addition, the p-value of the f-statistics showed that the whole regression is significant and a good fit. the stationarity properties of the variables were examined as a preliminary test prior to investigating the effect of capital structure on financial distress. as shown in table iii, the result showed that all the variables became stationary at the first difference; hence, the null hypothesis of the existence of unit root test is rejected, the granger causality test in table iii show bidirectional causality from short term debt z-score and unit directional causality from operating profit to debt equity ratio and total debt/ total assets to operating profit. 6. conclusion the study examined the effects of leverage on corporate financial distress of manufacturing in nigeria between the periods of 2008 and 20167 by employing the panel corrected standard error technique. the outcome of the research revealed that leverage affects corporate financial distress significantly. the result further revealed that total debt/total assets and debt equity ratio effect positively changes in operating profit while short and long term debt effect negatively changes in operating profits of the manufacturing firms. from the findings the study concludes that leverage affect significantly corporate financial distress of the quoted manufacturing firms in nigeria. 7. recommendation based on the research, the following recommendations have been provided:  financial structure of the manufacturing firms ought to be adequately planned to safeguard the interest of the equity holders, shareholders and financial requirements of the firm and the firms should formulate policies of increasing its equity capital as oppose to debt.  implementable investment policies should be formulated and the business environment should be well examined. recognizing faults of investment might be paramount to develop the business’s financial performance, since it specifies the loopholes which corrective decision can be applied.  companies should depend less on short term debt, which made the main portion of their leverage and emphasis on developing internal schemes to improve on their financial performance.  capital market regulators in nigeria should enhance the operational efficiency of the capital market for better equity financing and government should encourage firms to use internally generated fund than externally generated fund by granting preferential tax treatment on their retained earnings. references altman, e. 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(2007). capital structure and corporate performance: evidence from jordan. australian, accounting, business and finance journal, 1(4), 4053. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). copyright © cc-by-nc 2019, cribfb | afbr asian finance & banking review; vol. 3, no. 1; 2019 issn 2576-1161 e-issn 2576-1188 research article published by centre for research on islamic banking & finance and business, usa 24 effects of iran's wto accession on the cement industry: a dynamic disequilibrium adjustment model (ddam) of simultaneous equations bijan bidabad 1 nahid kalbasi anaraki 2 abstract many companies around the globe are re-examining their business operations to explore profitable growth in international markets.the attractiveness of the membership in wto can be recognized not only in the growing number of its members but also as a result of increasing access to potential markets around the world. iranian economy suffers from huge inefficiency in its trade relationships with other countries due to import compression policy and strict import controls. iran's import profile is heavily skewed towards those tradable that are not strongly under the effects of wto, indicating protectionism policy in the industry sector. besides the need for easing protectionism, the emphasis placed on the growth of non-oil exports and reducing oil dependency as an objective in the five-year development plans provides a strong argument for joining wto. measuring technical efficiency in the cement industry in iran suggests that companies with export-orientation policy have potentials to succeed in increasing their technical efficiency.the new discovering realm of wto for iran's trade policy has been evaluated in this paper. the pros and cons for joining induced us to investigate the effects of iran's membership on the cement industry. by designing a dynamic disequilibrium adjustment model (ddam), we use annual data for the period 1963-2002 to estimate a simultaneous system of econometric equations including cement supply, exports, imports, and consumption functions in order to quantify the effects of joining on the cement industry of iran. one of the main challenges confronting the iranian cement industry is to improve the competitiveness of the industry by reducing the subsidies, removing restrictions, and price controls. indeed, the experience of other counties after joining wto portrays a conflicting profile on the effects of accession on domestic economies. while some countries have developed important trading partners, others have suffered due to the loss of domestic industries. in this paper, we intend to examine the hypothesis of whether reducing the tariff rates will promote iranian cement industry. the results reveal that joining wto has negligible effects on consumption, production, and exports, though, will raise imports substantially. keywords: cement economics, dynamic disequilibrium adjustment model, ddam, wto, econometric model 1. introduction iran has a special geographical advantage regarding mining products international trade due to locating in the persian gulf region with high potentials since mineral products have been among the top ten imports of the persian gulf region. due to import compression policy and strict import controls, iran's import as a share of gdp is relatively low. moreover, her import profile is heavily skewed towards bulk foodstuffs and essential capital goods, reflecting recent currency shortage, import bans on many products and heavily protected industrial base. however, higher oil revenue since 2000 has eased pressures on iran's 1 (b.a., m.sc., ph.d., post-doc.) professor bijan bidabad, fars-o-khozestan cement co. economic advisor. this paper has been prepared by the order of fars-o-khozestan cement co. and the authors acknowledge financial support of this company. the views expressed herein are those of the authors and not necessarily those of fars-o-khozestan cement co. presented at the 4th european cement conference barcelona, spain 14-17 march 2004. 2 -dr. nahid kalbasi anaraki, fars-o-khozestan cement co. economic consultant. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 25 debt obligations, permitting the growth of imports in the essential goods. though, the cement imports as a share of gdp still stands at a very low level and is estimated to reach 0.025% in 2004. iran's cement is a 70 years old industry. the iranian cement industry dates back to 1993 when the first manufacture established in rai city. trends of consumption, production, and trade show that iran has a more or less closed cement economy due to import restrictions and export bans in specific years. as fluctuations of cement demand and supply clarify, whenever the price of oil grows up, demand increases due to increasing government development expenditures. as a result, excess demand appears, cement price increases and the import of cement grows up. to respond to the excess demand, cement producers try to enlarge cement production capacity with some lags, and after few years excess demand is removed by domestic supply, instead of imports. for many years, this was the case for the iranian economy. according to this dynamic procedure, we try to build up a dynamic disequilibrium adjustment model (ddam) to explain this phenomenon. but before going through this procedure, we will have a closer look at the cement industry with an emphasis on its output and trade. production: this section portrays a profile of the industry production. cement output has experienced sharp fluctuations during the period under investigation, 1963-2002. though cement production has increased by an average annual growth rate of 10 percent during the mentioned period, it stands at a very low level compared with other developing countries like china, india, and korea. indeed, the industry has produced above the nominal capacity due to demand pressures and restricted imports. over the period 1973-1978 with the oil shock and sharp increase in oil revenues cement production increased dramatically. however, after then and during the imposed war, the production plunged due to the war damages and scarcity of foreign exchange resources. the industry experienced a negative growth rate of 3.6% in 1988 due to unused capacity and reduction of productivity. however, during the post-war era, the production turned to an increasing trend due to the reconstruction activities in such a way that the output growth reached 16.7 percent in 1990. supply has exceeded the demand growth with the establishment of new plants and with the reduction in government expenditures since 1997. however, lack of access to international markets has induced cement producers to reduce their production due to the restriction imposed on cement exports. imports and exports: word trade of cement stands at a lower level than its production since the raw material for production are abundant and generally found in most parts of the world. despite the low ratio of world cement trade to the world production (7 percent in 1995), the growth of the cement trade has exceeded that of output due to the high volume of trade in south east asia. cement imports have been close to zero during the period under investigation except for the mid-1970s when iran confronted with a sharp increase in its oil revenues. however, this trend turned dramatically during 1975-1995, leaving the industry without any competitors due to a high level of protection, which has adversely affected the productivity of the industry. with the increase in the demand during the 1970s, domestic production failed to respond the aggregate demand, and as a result of this failure, the cement import increased substantially, recording a growth rate of 134% in 1977, compared with the previous year. though cement import has been relatively stable during the 1980s and 1990s, it experienced gradual growth in the early 2000s due to reconstruction activities and higher growth of the real-estate sector of the economy compared with other sectors. indeed, iran's cement imports and exports have been subject to tariff and non-tariff barriers. despite the cement shortage during the war, exports were subject to the permission of the ministries of commerce and mining. although exports incentives and tax exemptions were introduced in 1987, the instability of policy decisions and export bans in specific years contributed to the low growth of exports. for instance, the export of different types of cement and clinker was abandoned in 1996 and 1997. however, the copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 26 government was induced to remove exports barriers in order to avoid greater loss of manufactures in the following years. pricing: administrative controlled prices during the 1980s and 1990s have led to the low production of cement industry compared with other developing countries. it is worthwhile mentioning that a major factor contributing to cement prices is personnel expenses, which makes up 34 to 42 percent of the total costs, whereas the share of raw materials in total costs does not exceed 6 to 7 percent. the share of energy expenses and foreign exchange resources amounts to 18 and 14 percent of total costs, respectively. during the post-war era, the distribution and pricing policy was under the control of the government through the "cement planning committee" established in the management and planning organization (mpo). according to the regulations approved by this committee, cement producers were obliged to deliver their products to the ministry of commerce. with the end of the war in 1988, the distribution came under the control of the ministry of industries within the framework of a rationing system, and the share of the private sector, capital expenditures, and public sector amounted to 50, 40, and 10 percent, respectively. a major challenge confronting the iranian cement industry is administrative controlled prices. as it is seen in table (1), controlled prices have been fixed for a long period of time during 1982-87 and have huge gaps with international prices. for instance, the controlled price in iran has been $17.1 per ton, compared with $78.5 of the world price in 2000, which is almost less than one-fourth of the world price. indeed, the prices have been kept at very low levels artificially as a result of the high amount of revealed and disguised subsidies which have been allocated through the central government. with the exchange rate unification in 1990-91, and due to the increasing gap between the controlled and mark-up prices, there has been increasing pressures on domestic prices. with the start of the privatization program and the increase in the personnel and energy expenses, and with the increasing gap of the official exchange rate with the parallel black market exchange rate, the loss-making enterprises were unable to bear depreciation costs and as a result prices were liberalized in 1992, though still stand at much lower level than the world prices. since then, the equilibrium prices have been set through adding the book price with a margin profit rate set by the "production and distribution of cement committee" including the members of "protection of producers and consumers organization (ppco)", ministry of industry and management and planning organization (mpo). meanwhile, producers were allowed to distribute the production of higher than 90 percent of the nominal capacity and the cement enterprises were obliged to 0 500000 1000000 1500000 2000000 2500000 3000000 65 70 75 80 85 90 95 00 irexp irimp iran's cement export and import graph (1). iran's cement imports and exports copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 27 pay $ 0.9 to the ministry of industries for each ton of cement they deliver in order to help the cement projects. in addition, the ppco received the following share from each ton of sold prices. share of ppco=.9[sold price – (mark-up price+5000rls)] however, the consumer price was calculated by adding up the mark-up price to 15 percent margin of profit and 1 percent municipalities' fee, 2 percent ministry of education fees, and $ 0.5 for helping the ministry of economic affairs and finance. although considering 15 percent margin of profit rate for produces has alleviated the financing problem of energy inputs and personnel expenses, this method of pricing has failed to cover the depreciation costs. in addition, the prices are lower for the older plants due to lower mark-up prices. as table (1) suggests, the price of cement has been relatively stable during the post-war period throughout 1982-1990. however, since the early 1990s, the controlled price has jumped up dramatically and has reached $ 17.1 in 2000, which is around one-fourth of the world price, $78.5. table (1) iran's cement controlled prices compared with the world prices year controlled prices per ton in rials $ price per ton in iran world price ($ per ton) 1982 3100 24.1 56.69 1983 3100 23.2 55.61 1984 3100 22.2 57.18 1985 3700 27.4 55.92 1986 3700 31.6 54.78 1987 3700 23.5 54.41 1988 4200 16.2 54.80 1989 4200 13.4 54.80 1990 4200 10.07 55.34 1991 10000 17.7 55.46 1992 10500 14.9 55.30 1993 20000 18.7 56.36 1994 25000 15.2 61.88 1995 33500 16.6 67.84 1996 42000 17.7 70.89 1997 55000 19.1 73.46 1998 71500 20.7 76.45 1999 85800 17.7 78.27 2000 102960 17.1 78.56 0 10 20 30 40 50 60 70 80 65 70 75 80 85 90 95 00 irprice/ireenoil wprice iran's domestic and international cement prices 0 50 100 150 200 250 300 65 70 75 80 85 90 95 00 irprice/550 irwprice approved and market cement prices graph 2. iran's cement controlled prices and the wholesale price index of cement iran’s domestic and world cement prices (ton/dollar) copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 28 2. literature review unfortunately, little empirical study has been carried out on the cement industry of iran. ramin dadras (1999) tries to measure the technical efficiency of the industry, using stochastic frontier translog production and cobb-douglas functions. 3 the estimated results suggest that the inefficiency has increased during the time, and the ownership type and presence of exports affect the efficiency of the industry. moreover, the estimated elasticities for the translog function suggest increasing returns to scale in the cement industry. the estimated elasticities with respect to capital and labor according to the translog function are 0.82 and 0.22, respectively. the estimated technical efficiency of the industry according to the translog function and cobb-douglas functions amounts to 0.87 and 0.85, respectively. put differently; the industry has produced 13 percent less than it could, given the amount of inputs and energy. as it is seen in table (2), mean of efficiency has jumped up since 1992, with the start of the first five year development plan. however, since 1994, the industry has experienced a decreasing trend of technical efficiency. this shift, in turn, is attributed to the excess supply and to a substantial reduction in government expenditures in infrastructure and real estate sectors. as a result of the excess supply, the number of enterprises forced to export their products increased from 8 in 1994 to 13 in 1996. however, cement export bans in 1996 acted as a slash to the efficiency of the industry. it is worthwhile mentioning that some of the enterprises have experienced stable efficiency during the period under investigation. for example, fars cement and sepahan cement enterprises have experienced stable efficiency during the time and the highest amount of efficiency in the sample, whereas khazar cement co. had the lowest efficiency score. since 1994 with the entry of the cement enterprises to the tehran stock exchange (tse) efficiency has decreased substantially. however, one cannot argue that the decreasing trend of efficiency can be attributed to the accession to tse. indeed, one of the main reasons for the decreasing trend of efficiency is the instability of regulations governing exports of the industry, particularly, exports bans in 1996 and 1997. table (2)-technical efficiency of the cement industry in iran during 1991-1997 1991 1992 1993 1994 1995 1996 1997 number of plants 9 13 14 15 16 16 16 mean efficiency 0.80 0.90 0.91 0.89 0.87 0.88 0.85 standard deviation 0.10 0.06 0.05 0.06 0.16 0.14 0.11 minimum 0.59 0.73 0.76 0.73 0.27 0.40 0.50 maximum 0.93 0.95 0.95 0.95 0.95 0.96 0.94 source: dadras, ramin, "measuring the technical efficiency of the cement industry in iran, a dissertation guided by b. h. zonooz, allameh university, 1999 in another study, morteza sameti (1995) 4 measures the efficiency of cement industry in different sectors. his sample includes four cement companies, two public enterprises, one private, and one cement company affiliated to the mostazafan and janbazan foundation, which is a semi-government organization. he uses a cobb-douglas production function to measure the efficiency of the production. the estimated results suggest that the elasticity of production with respect to the labor force for tehran cement company, which is affiliated to the foundation, has had the highest elasticity score. the private cement company, shargh cement co. stands at the second level, and finally, the public sector companies have had the lowest elasticities. 3 -dadras, ramin, "measuring the technical efficiency of the cement industry in iran, a dissertation guided by b. h. zonooz, allameh university, 1999. 4 -sameti m., "reducing government interventions", ministry of economic affairs and finance, 1995. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 29 he also has estimated the productivity of the labor force in different companies. his results indicate the highest level of labor productivity in tehran cement co. and the lowest level in public sectors companies. however, with respect to capital productivity, the private sector company has experienced the highest productivity level. finally, a long-run total cost function has been estimated with pooling data on different companies with different types of ownership. the estimated results indicate that the tehran cement company has had the lowest production costs and then the private sector and public sector companies stood at the second and third levels, supporting the estimated results of productivity. put differently, companies with higher productivity have experienced lower production costs. indeed, the estimated results suggest that public sector enterprises confront with higher costs since they have been assured of receiving a large amount of government subsidies and has taken no important invention to reduce their operating costs. wto and countries experiences the treaty negotiated during the uruguay round established the wto, the international institution to govern the world trade. the success of gatt as a dynamic institution that has fostered dramatic increase in worldwide trade lies in its founding principles of most favored nations treatment (mfnt), voluntary export restrictions (vers), orderly marketing arrangements (omas), rules of origin, government procurement, safety rules, market access commitments and reciprocity and non-discrimination. thus, nondiscrimination extends the benefits of a reciprocal tariff reduction beyond the two parties. nondiscrimination is a convenient way to reduce the complexity of international trade relations. as an importer, a country can charge a single nondiscriminatory tariff on imports from all countries, or it can set different tariffs on imports from different countries. under a nondiscriminatory tariff system, imports will be sourced from the lowest-cost producers in the world. when a country uses a nondiscriminatory tariff, this facilitates the allocation of resources worldwide to their most productive uses. countries' experiences portray a contradictory profile. while some countries like china have benefited from joining wto, others have suffered due to the loss of domestic industries. in china, foreign investment is playing an increasingly important role in shaping up the chinese market. in 1998, there were 287 foreign-invested enterprises accounting for about 3% of all cement producers and 15% of national output. china is the world's second-largest cement exporter, accounting for about 17% of total global cement trade. china had cut the average tariff level of imported goods from 15.3 percent to 12 percent in 2002; this reduction is fully in conformity with the commitment china has made for its accession to the world trade organization. indeed, wto accession should not have much of an impact on the cement industry, as a tariff on cement and clinker dropped only from 12 percent to 10 percent in 2001 and is not due to falling any further. in sum, china's experience reveals a success story because domestic protection has not stood at high levels before joining wto. taiwan is another success story. before the accession, the average levels of tariffs on imports of industrial and agricultural products into taiwan were 6.03 and 20.02 percent, respectively. upon accession (2002), the two figures were reduced to 5.78 and 14.01 percent, respectively. following the completion of all the scheduled tariff reductions on the 3470, industrial and 1021 agriculture products for which taiwan has made commitments; the average levels of tariffs applied on industrial and agricultural products fell further to 4.15 and 12.86 percent, respectively. the economic impact of its wto membership on the economies of its trading partners, as well as taiwan itself, will be worth billions of dollars annually. according to a recent report by the council of economic planning and development (cepd), taiwan's gdp is likely to expand by an additional 0.77-4.7 percent in the first five to ten years of wto membership. others, like indonesia, confronts a possible crisis. when the crisis was at its peak in 1998 in indonesia, the utilization rent of cement industry went down to 50 percent. this forced the producer to export at lower margins than those available in the domestic market. indonesia exported some 4.5 million tons of copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 30 cement and clinker in 1998 following the plunge in domestic demand, while production reached 22 million tons per year. the increasing cement exports since the crisis pushed export's share of total cement production from 1 percent in 1996 to 33 percent in 1999. though there was an increase in exports, the country's total cement production continued to decrease as domestic consumption dwindled. now that increasing domestic demand has pushed up the cement industry back to its pre-crisis levels, the indonesian cement association (asi) has signaled that cement exports would likely decrease. last year, exports reached around 8 million tons. however, the increasing domestic demand could bring about a rising crisis in the years to come if the present production capacity is not increased. as itself, has projected a problem will rise in the cement supply in the coming years because the growth of product capacities would be less than the average of 3-5 percent growth rate of demand. to prevent a possible crisis, new plants, and more supply of raw materials are needed. to encourage investment, the government could provide such incentives as tax holidays. wto membership and associated trade liberalization are crucial for the persian gulf region's future economic prospect, lifting economic growth and boosting foreign investor confidence. oman, saudi arabia, and yemen have applied for membership and are negotiating entry conditions, although yemen's accession is in its infancy. iran's application for wto membership has not been scheduled for consideration due to us opposition. indeed, wto membership is an important driver of reform, limiting the amount of protection. trade liberalization, particularly elimination of subsidies, protection of intellectual property rights, and equal treatments for domestic and foreign companies are all requirements of wto memberships. members also must remove non-tariff barriers, such as certification, licensing, government procurements, and inspections not in accordance with wto rules. oman's accession is imminent. the accession process has driven major reforms. oman has agreed to liberalize tariff and bind tariff commitments for agricultural exports as well as minerals, cars, information technology products, chemicals, paper products, and construction materials. oman has also agreed on no tax discrimination between domestic and foreign companies and has increased foreign ownership limit from 49 percent to 70 percent. saudi arabia wto accession has important domestic and regional implications, given the saudi economy's size. saudi arabia's unilateral foreign investment liberalization announcement in april 2000 and its improved tax treatment for foreign companies already have placed the region countries like uae under pressure to improve their treatment of foreign investors. bilaterally agreed market access improvements, which will apply to all wto members, will yield significant benefits. multilateral negotiations also could yield major improvements in access to the saudi arabia market via reduced agriculture subsidies, fewer quantitative restriction, improved intellectual property rights, equal tax treatment for domestic and foreign companies, and improved customs procedures. indeed, countries' experiences reveal that a crucial factor affecting success story of countries is the structure of the domestic industry and the level of protection on the domestic industry before joining wto. countries that have already reduced their tariff rates before joining wto more likely will benefit from entry, though, countries with high tariff rates that need to liberalize their domestic markets to imports suddenly will more likely confront with potential losses. tariff and non-tariff barriers in iran tariff barriers vary substantially across the persian gulf economies; kuwait and the uae have the lowest average tariffs around 3.5 percent, and saudi arabia has had the highest tariff rates among arab countries. in the uae, most tariffs are 4 percent, although around 75 percent of import is duty-free including foodstuffs, medicines and public sector imports. saudi arabia's simple average tariff rate is 12.5 percent. imports of basic foodstuffs and medicines are duty-free, with a general 12 percent tariff on most other imports, and a 20 percent tariff on many imports which also are produced locally. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 31 qatar: the general tariff rate is 4 percent, but tariffs of 20 to 30 percent apply to goods competing with local products such as cement, steel, and urea. bahrain: imports of raw materials, semi-manufactured goods, and products for development projects or re-exports are duty-free. tariff starts at 5 percent on foodstuffs and necessities, and as in many other regional economies, much higher rates apply to cigarettes (50 percent). oman: a wide range of essentials consumer goods enter duty-free, as do industrial inputs. luxury consuming goods, including tea, coffee, and prepared foods, attract 15 percent tariff, while cars incur 10 to 15 percent tariff rates depending on the engine size. yemen: since 1996, as part of the imf sponsored reform program, tariffs have fallen to the domain of 5 to 25 percent. iran: most consumer goods imports incur 30 to 50 percent tariffs. capital and intermediate goods attract lower tariffs, while medicines, wheat, and other strategic/essential goods are duty-free, and non-essential imports are often banned. indeed, the cement industry has been heavily regulated through tariff and nontariff barriers on cement imports and exports, resulting in a low level of trade compared with domestic production. to review the tariff and non-tariff barriers in iran, we focus on the data in 1999, the most recent available data on tariffs. according to export-import regulations, goods and commodities are categorized under 21 sectors. table (3) presents the minimum, maximum, and average tariff rates of different categories in 1999. as it is seen, the lowest tariff rate applies to chemical industries among different sectors. the cement industry in the fifth category has experienced an average tariff rate of 35.7 percent. indeed, the cement industry has been relatively less protected than sectors like food industries or textile; however, has been heavily protected compared with sectors like chemical industries with an average tariff rate of 18.9 percent. moreover, the industry has confronted with export bans in specific years, especially in 1995 and 1996. indeed, the high level of tariff and non-tariff barriers has contributed to a low level of cement production in iran. comparing average tariff rates in iran with other countries, as revealed in table (4), shows that iran has experienced a much higher level of protection. for instance, the average tariff rates in the industrial sector in turkey, singapore, and philippine amounts to 5.7, 2.7, and 9.1, respectively. even compared with thailand with an average tariff rate of 43.7, and india with an average tariff rate of 29.5, iran has experienced much higher tariff rates in some industries including food and textile. the matter of the fact is that iran's protectionism policy has been very intense compared with other developing countries leading to smuggling and trafficking of goods due to the high amount of subsidies allocated to some sectors through the central government. with a new era of international trade, many countries have reduced their tariff and non-tariff barriers to be eligible to join wto. the research studies carried out in developing countries suggest that amount of reduction in tariff rates vary substantially depending on trading partners, the composition of foreign trade, the structure of the ownership, and the level of protection before joining wto. table (3). average tariff rates for different categories in iran (1999) category items no of tariffs min tariff max tariff average tariff 1 animal and animal products 201 0 180 62.3 2 vegetables, fruits and wheat 271 0 200 85.9 3 soya bean oil and non-vegetarian oil 46 0 175 55.0 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 32 4 food industry, beverage, and tobacco 186 0 200 103.7 5 mineral products 148 5 110 22.6 6 chemical industries and related items 786 0 210 18.8 7 crude rubber and caoutchouc 198 5 215 38.5 8 leather and leather made commodities 74 5 215 127.1 9 wood and wood products 81 5 215 71.6 10 paper and paper products 148 5 135 37.9 11 textile and related items 824 10 270 109.0 12 shoes, umbrella, and sun-glasses 55 120 220 204.7 13 chalk, asbestos, tile, and glass 147 5 220 78.3 14 pearl. precious stones and gold 52 5 270 39.0 15 non-precious stones 571 5 325 43.7 16 electronic instruments, tape records, tv 804 0 180 41.5 17 transportation vehicles 132 0 190 na 18 optics, cameras, medical and surgery instruments 238 5 145 35.6 19 guns and related items 17 80 80 80 20 sport goods and toys 130 15 215 130.6 21 paintings and antiques 7 5 5 5 source: razini ali, rationalizing tariff rates in iran, trade research center, ministry of commerce, 1999. table (4)tariff commitments of selected countries for industrial products in 1999 member percent of imports with bound tariffs current mean industrial tariff applied bound tariff philippines 67.4 9.1 21.3 indonesia 92.3 14.9 36.9 malaysia 79.3 9.4 8.9 singapore 96.5 2.7 6.9 thailand 67.4 43.7 27.3 brazil 100 18.3 27.7 chile 100 10.9 24.9 india 69.3 29.5 34.2 sri lanka 9.2 19.8 17.9 turkey 49.3 5.7 16.3 zimbabwe 13.6 20.5 23.6 australia 96.9 4.4 12.1 canada 99.8 3.2 4.3 european union 100 3.5 3.2 korea 89.9 7.8 6.9 mexico 100 12 33.3 united states 100 2.7 3.5 source:www.cementdistribution.com/industryinfo/trade.html non-tariff barriers in iran the market regulating committee 5 is in charge of cement pricing and has approved the following regulations in 2002 regarding the cement industry in iran. according to these regulations, the clinker price for the year 2003 is obtained by adding up the base price in 2002 to 15 percent growth rate. the amount of sale by each company should be determined by a committee, which consists of the vice minister of commerce, vice minister of industries and vice minister of housing. according to the regulations approved by the cited committee, enterprises are obliged to use the difference between 5a committee established for confronting with shortage of the essential goods and commodities which is under the control of the expediency council. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 33 controlled price and the equilibrium price for increasing the capacity of the cement industry. meanwhile, the main shareholders of the cement industry including; social security organization, mostazafan and janbazan foundation, and the national bank of iran are responsible for importing cement or clinker according to the needs announced through the above-mentioned committee. the controlled price will be set on a quarterly basis. in addition, the profit margins for the wholesale and retail sellers will be determined by this committee and will be approved by the consumers and producers protection organization (cppo). the ministry of industries will be in charge of determining the cement prices in different enterprises, depending on the region and the quality of production. all producers and distributors are subject to administrative controlled prices. moreover, the cement producers are responsible for allocating a portion of their profits for financing the difference in the controlled price and the import price of cement and clinker. ministry of industries is responsible for the imports of clinker and cement. the management and planning organization (mpo) and the central bank of iran (cbi) are committed to providing financial facilities to respond to the needs of establishment and especially for increasing the existent capacities. however, white cement is excluded from the above-mentioned regulations. as it is seen, the cement industry in iran is heavily regulated and protected through different committees and organizations, which are involved in determining administrative controlled prices and distribution mechanism. indeed, the industry has failed to respond to domestic demand due to the existence of tariff and non-tariff barriers. accession to the world trade organization (wto) requires removing the controlled prices, quantitative restrictions, and bans on imports and exports, which are all requirements for improving the competitiveness of the industry. indeed, joining the wto requires carrying out essential reforms to reduce the tariff rates substantially. to assess the effects of tariff reduction on the cement industry, the next section develops a structural system of equations, including supply, demand, exports, imports, and prices. future trade prospects trade prospects are good in the short-run and medium term. during 2000-2003 high oil prices have driven rapid import growth in the persian gulf economies, though beyond 2003, this factor may not sustain continued growth. in the medium term, wto is becoming an increasingly important force for liberalization in the region, reducing tariff and removing non-tariff barriers, improving intellectual property right protection, deregulating and liberalizing agency arrangements and opening rapidly growing sectors such as telecommunications and e-technologies. its influence is likely to increase if saudi arabia's accession is successful. common gcc external tariffs may raise average tariffs in some of the region's most open economies, like the uae and kuwait; however, increased integration also can promote intraregional trade and hence manufacturer's ability to move beyond the gulf region from base manufacturing, the oil. in the medium term, iran may become a substantially more important trading nation in the persian gulf region since she has rapid population growth and is willing to carry out economic reforms in accordance with wto agreements. 3. methodology to determine the quantitative effects of iran's joining wto on her cement industry we try to build up a dynamic disequilibrium adjustment model (ddam) to investigate the effects of tariff reductions on production, consumption, and trade, with emphasis on simultaneous domestic price effect in changing domestic production and consumption. the sample under investigation covers the period 1963-2002. the data on the cement industry has been obtained from the cement companies and macroeconomic data including gdp , cement wholesale price index, and iran's effective exchange rate has been obtained from copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 34 the data bank of the central bank of iran. the world production and prices have been obtained from international trade statistics. list of variables irycd=iran's cement output (domestic supply) irimp=iran's cement imports in tons irexp=iran's cement exports wprice=world price of cement irprice=iran's approved cement price (rials per ton) irwprice=iran's cement wholesale price index irgdp=iran's gdp at constant factor prices irgdpnf=non oil gdp at factor costs ireenoil=iran's effective exchange rate (units of rials per u.s. dollars) excess=change in cement inventory in iran ncapacity=nominal capacity of cement production in iran consd=cement consumption of domestic production variables starting with "d" and following with two or four digit numbers are dummy variables whose values are one for the specific period denoted by digits and zero otherwise. the proposed ddam consists of the following equations: irimp=c(10)+c(11)*irgdp+c(12)*ireenoil*wprice/irwprice+c(13)*irimp(-1)+ c(14)*d5972*irimp(-1)+c(15)*d77+c(16)*d79+c(76)*d7905 irexp=(1-d7286)*(c(21)*ncapacity+c(22)*ireenoil*wprice/irwprice+ c(23)*irexp(1))+c(24)*d0205+c(25)*d71 log(irycd)=c(30)+c(31)*log(irwprice)+c(32)*log(ncapacity)+ c(33)*log(irycd(-1)) log(consd)=c(40)+c(41)*log(irwprice)+c(42)*log(irgdpnf)+c(43)*@trend+ c(44)*d5978 log(irwprice) =(c(51)*excess+c(52)*log(irwprice(-1)))*(1+c(53)*d9405) excess=irycd+irimp-consd-irexp tbalance = irexp-irimp the interaction mechanism of the model is very simple. import, export and domestic production and consumption of cement are determined by the first fourth equations, and the sixth identity calculates changes in the inventory of cement. price of cement is determined by the fifth equation, which is a difference equation and can oscillate in varieties of ways based on its lags structure, parameters' signs and magnitudes. cement price simultaneously is determined by the existence of this variable in the first four equations. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 35 4. estimated results all equations have been estimated by ols method. the estimated results suggest, as presented in table (5) that all statistics are econometrically meaningful and statistically significant in all equations. the estimated results suggest that cement import covaries positively and significantly with gdp and negatively with the real effective exchange rate. export equation reveals the fact that cement export is significantly and positively related to nominal capacity and real effective exchange rate. cement production covaries positively and significantly with the cement wholesale price index through the size of influence is negligible. however, the nominal capacity has a positive and significant influence on domestic production. domestic consumption is negatively and significantly related to the cement wholesale price index, as expected and positively and significantly in relation to gdp. table (5). estimated results for the ddam for the cement industry of iran independent variable irimp irexp irycd consd irwpric e irgdp 1.61 (4.12) irgdpnf 0.91 (17.08) irenonoil -167 (-3.4) 27.6 (2.44) irimp (-1) 0.55 (11.3) ncapacity 0.69 (2.27) 0.27 (3.87) irexp(-1) 0.32 (1.97) irwprice 0.02 (2.41) -0.20 (-7.51) 1.08 (62.13) irycd(-1) 0.59 (7.25) excess 8.46e-08 (2.55) r-squared 0.97 0.88 0.99 0.99 0.99 adjusted r-squared 0.97 0.87 0.99 0.99 0.99 durbin-watson 1.29 1.76 2.10 1.34 1.20 to analyze the effects of iran's wto accession on the iranian cement industry we solve the model for the period of 1993-2002 by stochastic simulation with 1000 replication to find out the baseline scenario which is used as a control solution to compare with an alternative scenario which has been modified to measure iran's wto joining effect. the result of the baseline solution model is presented in annex 1. since the data on tariff rate for the time period under investigation is not available, to measure the effects of tariff reduction within the model, we decrease book price of cement both for imports and exports to be in conformity with wto agreements. to do so, we multiply the real effective exchange rate variable in both import demand and export supply equations of the model by )1(  , where  is the percentage of tariff reduction that may be proposed by wto. the results are presented in annex 2. to measure the amount of tariff reduction, we use pre and post wto joining tariff profiles for imports of industrial products by the country group as a proxy for the tariff reduction rate. according to unbalanced copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 36 tariff reductions for developed and less developed countries, and regarding previous studies 6 we adopt to apply 69% tariff reduction on iran's import of cement from dcs and 14% tariff reduction for iran's exports to dcs. though these numbers are guess estimates but can show the effects of joining wto on iran's cement economics. using stochastic simulation of model 2 with the same characteristics of model 1, regarding the sample period and 1000 replication, we produced the alternative solution which can be compared with the control solution (annex 3). the following graphs and tables compare the mean and standard deviations of these two solutions. the results of the simulations are presented in annex 4. in sum, the estimated results and simulations indicate that iran's joining wto:  does not affect her domestic cement consumption.  has negligible decreasing effects on cement exports  will dramatically increase iran's cement imports  price adjustment is as dynamic as changes in total cement demand and supply and will adjust itself more rapidly after joining wto  changes in domestic supply will be negligible after joining wto  all in all, joining wto may cause the cement trade deficit 6 bidabad b., "designing econometric model to measure the changes in imports and exports of the industry sector", chapter 5, 1996. ______ "quantitative effects of joining wto on iran industrial sector", 2004. 1.2e+07 1.6e+07 2.0e+07 2.4e+07 2.8e+07 3.2e+07 3.6e+07 93 94 95 96 97 98 99 00 01 02 actual consd (baseline mean) consd (scenario 1 mean) consd ± 2 s.e. -1.5e+07 -1.0e+07 -5.0e+06 0.0e+00 5.0e+06 1.0e+07 1.5e+07 93 94 95 96 97 98 99 00 01 02 actual excess (baseline mean) excess (scenario 1 mean) excess ± 2 s.e. -100000 0 100000 200000 300000 400000 500000 600000 700000 800000 93 94 95 96 97 98 99 00 01 02 actual irexp (baseline mean) irexp (scenario 1 mean) irexp ± 2 s.e. -600000 -400000 -200000 0 200000 400000 600000 800000 93 94 95 96 97 98 99 00 01 02 actual irimp (baseline mean) irimp (scenario 1 mean) irimp ± 2 s.e. -100 0 100 200 300 400 500 600 700 93 94 95 96 97 98 99 00 01 02 irwprice irwprice (baseline mean) irwprice (scenario 1 mean) irwprice ± 2 s.e. 1.2e+07 1.6e+07 2.0e+07 2.4e+07 2.8e+07 3.2e+07 93 94 95 96 97 98 99 00 01 02 actual irycd (baseline mean) irycd (scenario 1 mean) irycd ± 2 s.e. -500000 0 500000 1000000 1500000 93 94 95 96 97 98 99 00 01 02 actual tbalance (baseline mean) tbalance (scenario 1 mean) tbalance ± 2 s.e. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 37 4. conclusion iran has a unique geographical situation in the persian gulf region for boosting trade in different commodities, especially minerals. reducing oil dependency as one of the main objectives of the five years development plans has induced the iranian officials to undertake some essential reforms in trade and government policies. though iran still suffers from high levels of tariff and non-tariff barriers on her trade relations and internal obstacles on domestic industries, in the medium term, iran may become a substantially more important trading nation in the persian gulf region since she has rapid population growth and is willing to carry out economic reforms. the administrative price controls besides import compression policy have contributed to the low level of cement production. iran's import profile is heavily skewed towards those tradable that are not strongly under the effects of wto, indicating protectionism in the industry sector. trade liberalization that has been carried among the persian gulf region's economies provides a supportive argument for iran's accession to wto. since countries' experiences provide a contradictory profile after joining wto, this paper tried to investigate the quantitative effects of the entry accession on the cement industry of iran. to do so, we developed a dynamic disequilibrium adjustment model (ddam) with data covering the period 1963-2002. assuming 69 percent tariff reduction on iran's imports of cement from dcs and 14 percent tariff reduction for iran's exports to dcs after accession and applying stochastic dynamic simulation results for the period 1993-2002 with one thousand replications suggest that iran's accession to wto has negligible effects on her domestic consumption, production, and exports, while it substantially raises its cement imports. all in all, the results suggest that iran's wto accession does not have tremendous effects on its production, exports, and consumption. though the entry may accelerate cement imports. since the cement is used as an essential input for the industry and real-estate sectors, which has highly contributed to the gdp growth in recent years, it is expected that it may contribute to a higher level of economic growth in years to come. to pave the way for joining wto, iran has to take important measures to liberalize controlled prices, to remove quantitative restrictions, and to deregulate the industry in conformity with wto arrangements. references balassa b. (1971). the structure of protection in developing countries. john hopkins press, baltimore. baldwin, richard e. (2000), regulatory protectionism developing nations, and a two-tier world trade system. bidabad, bijan. (1994). quantitative effects of joining wto on iran industrial sector. bidabad, bijan.(1994). designing an econometric model to measure the changes in imports and exports of the industry sector , chapter 5. bidabad, bijan; mahshid sherafati, roohollah mohammadi.(2014).measuring efficiency of production and cost in abyek cement factory using operational and efficient production functions. international conference on business strategy and social sciences (icbsss), asian economic and social society (aess), faculty of technology management and business, universiti tun hussein onn malaysia, and pak publishing group. 16-17 august 2014, kuala lumpur, malaysia. http://www.bidabad.com/doc/abyekfunction-en.pdf bidabad, bijan; mahshid sherafati, roohollah mohammadi.(2014).a financial model for economic analysis of cement factory. international conference on business strategy and social sciences (icbsss), asian economic and social society (aess), faculty of technology management and business, universiti tun hussein onn malaysia, and pak publishing group. 16-17 august 2014, kuala lumpur, malaysia. http://www.bidabad.com/doc/abyekanalysis-short-en.pdf http://www.bidabad.com/doc/abyekfunction-en.pdf http://www.bidabad.com/doc/abyekanalysis-short-en.pdf copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 38 bora, b., a. kuwahara, s., laird. (2002). quantification of non-tariff measures, policy issues in international trade and commodities, study series no. 18. united nations, trade analysis branch, division on international trade in goods and services, and commodities, united nations conference on trade and development (unctad), geneva, switzerland. http://r0.unctad.org/p166/module2002bangk/module4/boralairdkuwa.pdf borland, b., 2000, gulf 2000: the wto and gcc, paper presented at the gulf 2000: energy infrastructure and finance conference, abu dhabi, 28 and 29 march bosworth, malcom .(1999). non-tariff measures as trade barriers: yesterday problem or what? paper prepared for the oecd workshop with non-member economies on barriers to trade in goods and services in the post-uruguay round context. paris, 27-28 september. bouet, a., l. fontagne, m. mimouni, x. pichot (2001), market access maps: a bilateral and disaggregated measure of market access. corden w.m. .(1971). the theory of protection. clarendon press, oxford. dadras, r. 1999, 'measuring the technical efficiency of the cement industry in iran, a dissertation guided by dr. b. h. zonooz, allameh university, tehran. deardorff, a., r. stern. (1998). the measurement of non-tariff barriers, oecd, economic department working papers no. 179, oecd, washington. fieleke n.s. (1995) the uruguay round of trade negotiations. industrial and geographic effects in the united states. new england economic review. federal reserve bank of boston. july/august. fieleke n.s. (1995) the uruguay round of trade negotiations. industrial and geographic effects in the united states. new england economic review, federal reserve bank of boston, may/june. general agreement on tariffs and trade. “the results of the uruguay round of multilateral trade negotiations”, geneva, november 1994. heller h.r. (1995) international trade, theory and empirical evidence, prentice hall of india, new delhi. http://heiwww.unige.ch/~baldwin/papers/ntbs_brookings_trade_forum00_baldwin.pdf intriligator m.d. (1978). econometric models, techniques, and applications. north-holland publishing company. mohammed reza raf'ati, 1995, ' iran's standing in global trade and upshots of membership the gatt, payame darya (economic-scientific monthly), vol. 4, no.33, pp. 14-25. razini ali, rationalizing tariff rates in iran, trade research center, ministry of commerce, 1999. sameti, m., 1995. 'reducing government interventions', ministry of economic affairs and finance, tehran, iran. http://www.cepii.fr/anglaisgraph/communications/pdf/2001/washington/macmaps.pdf http://www.nuca.ie.ufrj.br/infosucro/biblioteca/negociacoes/baldwin_regulatory.pdf annex 1 system: sys02 estimation method: iterative least squares sample: 1963 2002 included observations: 40 total system (unbalanced) observations 196 convergence achieved after 2 iterations coefficient std. error t-statistic prob. c(10) 356713.0 89239.77 3.997242 0.0001 c(11) 1.614763 0.391224 4.127468 0.0001 c(12) -167.8328 49.08161 -3.419465 0.0008 c(13) 0.553647 0.048830 11.33823 0.0000 c(14) -2.844118 0.717737 -3.962618 0.0001 c(15) 1575730. 118637.0 13.28195 0.0000 c(16) -1029487. 139216.0 -7.394891 0.0000 c(76) -465079.1 65039.66 -7.150699 0.0000 http://r0.unctad.org/p166/module2002bangk/module4/boralairdkuwa.pdf http://heiwww.unige.ch/~baldwin/papers/ntbs_brookings_trade_forum00_baldwin.pdf http://www.cepii.fr/anglaisgraph/communications/pdf/2001/washington/macmaps.pdf http://www.nuca.ie.ufrj.br/infosucro/biblioteca/negociacoes/baldwin_regulatory.pdf copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 39 c(21) 0.693379 0.305329 2.270925 0.0244 c(22) 27.63896 11.29419 2.447184 0.0154 c(23) 0.324899 0.164908 1.970181 0.0504 c(24) 394125.0 47465.98 8.303316 0.0000 c(25) 174850.0 45179.54 3.870114 0.0002 c(30) 3.553863 0.626057 5.676581 0.0000 c(31) 0.029530 0.012247 2.411316 0.0170 c(32) 0.271043 0.069899 3.877621 0.0002 c(33) 0.598896 0.082511 7.258341 0.0000 c(40) 4.136804 0.553261 7.477131 0.0000 c(41) -0.208590 0.027749 -7.517172 0.0000 c(42) 0.910048 0.053252 17.08955 0.0000 c(43) 0.059990 0.006514 9.208956 0.0000 c(44) -0.267502 0.044555 -6.003929 0.0000 c(51) 8.46e-08 3.31e-08 2.557616 0.0114 c(52) 1.089052 0.017527 62.13742 0.0000 c(53) -0.040562 0.018605 -2.180109 0.0306 determinant residual covariance 3.07e+12 equation: irimp=c(10)+c(11)*irgdp+c(12)*ireenoil*wprice /irwprice+ c(13)*irimp(-1)+c(14)*d5972*irimp(-1)+c(15)*d77+c(16)*d79+c(76)*d7905 observations: 39 r-squared 0.977260 mean dependent var 263560.7 adjusted r-squared 0.972125 s.d. dependent var 620654.5 s.e. of regression 103623.4 sum squared resid 3.33e+11 durbin-watson stat 1.296946 equation: irexp=(1-d7286)*(c(21)*ncapacity+c(22)*ireenoil *wprice/irwprice+c(23)*irexp(-1))+c(24)*d0205+c(25)*d71 observations: 39 r-squared 0.885778 mean dependent var 93074.18 adjusted r-squared 0.872340 s.d. dependent var 120420.2 s.e. of regression 43025.50 sum squared resid 6.29e+10 durbin-watson stat 1.767650 equation: log(irycd)=c(30)+c(31)*log(irwprice)+c(32) *log(ncapacity)+c(33)*log(irycd(-1)) observations: 39 r-squared 0.995544 mean dependent var 15.84935 adjusted r-squared 0.995162 s.d. dependent var 0.927457 s.e. of regression 0.064510 sum squared resid 0.145656 durbin-watson stat 2.109574 equation: log(consd)=c(40)+c(41)*log(irwprice)+c(42) *log(irgdpnf)+c(43)*@trend+c(44)*d5978 observations: 40 r-squared 0.995519 mean dependent var 15.79203 adjusted r-squared 0.995006 s.d. dependent var 0.989941 s.e. of regression 0.069955 sum squared resid 0.171278 durbin-watson stat 1.347284 equation: log(irwprice) =(c(51)*excess+c(52)*log(irwprice(-1)))* (1+c(53)*d9405) observations: 39 r-squared 0.994469 mean dependent var 2.031391 adjusted r-squared 0.994161 s.d. dependent var 1.888493 s.e. of regression 0.144301 sum squared resid 0.749616 durbin-watson stat 1.205921 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 40 annex 2. model for baseline solution irimp=356712.976885967+1.61476270618398*irgdp-167.832811413045*ireenoil* wprice/irwprice+0.553647193085624*irimp(-1)-2.84411769308308*d5972*irimp(1)+1575730.35363319*d77-1029487.01407616*d79-465079.055437859*d7905 @innov irimp 103623.3858 irexp=(1d7286)*(0.693379435212086*ncapacity+27.6389569885331*ireenoil* wprice/irwprice+0.324898912988592*irexp(-1))+394125.044423648* d0205+ 174849.960849296*d71 @innov irexp 43025.49704 -200000 -100000 0 100000 200000 300000 400000 65 70 75 80 85 90 95 00 irimp residuals -100000 -50000 0 50000 100000 65 70 75 80 85 90 95 00 irexp residuals -.20 -.15 -.10 -.05 .00 .05 .10 .15 65 70 75 80 85 90 95 00 log(irycd) residuals -.25 -.20 -.15 -.10 -.05 .00 .05 .10 .15 65 70 75 80 85 90 95 00 log(consd) residuals -.4 -.3 -.2 -.1 .0 .1 .2 .3 .4 65 70 75 80 85 90 95 00 log(irwprice) residuals copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 41 log(irycd)=3.55386253259695+0.0295302269682137*log(irwprice)+0.271043101241564*lo g(ncapacity)+0.598896470243663*log(irycd(-1)) @innov irycd 0.06451036764 log(consd)=4.136803927695090.20859037839689*log(irwprice)+0.910047792543505*log(irgdpnf)+0.0599895559828637* @trend-0.267502133314843*d5978 @innov consd 0.06995458186 log(irwprice)=(8.45645793256322e-08*excess+1.08905173285413*log(irwprice(-1)))*(10.0405615985167576*d9405) @innov irwprice 0.1443005985 @identity excess=irycd+irimp-consd-irexp @identity tbalance=irexpirimp annex 3. model for alternative scenario solution irimp=356712.976885967+1.61476270618398*irgdp-167.832811413045*(1-0.69)* ireenoil* wprice/irwprice+0.553647193085624*irimp(-1)-2.84411769308308* d5972*irimp(1)+1575730.35363319*d77-1029487.01407616*d79-465079.055437859*d7905 @innov irimp103623.3858 irexp=(1-d7286)*(0.693379435212086*ncapacity+27.6389569885331*(1-0.14)* ireenoil*wprice/irwprice+0.324898912988592*irexp(-1))+ 394125.044423648*d0205+174849.960849296*d71 @innov irexp43025.49704 log(irycd)=3.55386253259695+0.0295302269682137*log(irwprice)+0.271043101241564*lo g(ncapacity)+0.598896470243663*log(irycd(-1)) @innov irycd0.06451036764 log(consd)=4.13680392769509-0.20859037839689*log(irwprice)+ 0.910047792543505*log(irgdpnf)+0.0599895559828637*@trend-0.267502133314843*d5978 @innov consd0.06995458186 log(irwprice)=(8.45645793256322e-08*excess+1.08905173285413* log(irwprice(-1)))*(1-0.0405615985167576*d9405) @innov irwprice0.1443005985 @identity excess=irycd+irimp-consd-irexp @identity tbalance=irexp-irimp copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 42 annex 4. simulation results 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 consd actual 162065 54 162664 73 156783 50 171079 58 189310 72 195837 44 195009 37 220950 48 252683 41 2740193 7 baseline 160378 84 159024 30 170185 63 187991 38 196545 92 206607 99 211199 47 221799 57 229871 99 2644272 1 s.e. 189530 8 177855 4 199889 3 242584 2 258778 8 279584 5 289242 8 315305 0 356637 8 4324011 scenario 1 159762 23 156799 65 169063 97 186323 74 195647 76 204079 61 208858 06 221704 49 227162 77 2648527 8 s.e. 184489 9 170640 1 189683 8 221846 3 255274 5 265193 9 281484 2 311062 9 336131 3 4625671 excess actual 122047 254573 484747 184983 467738 520582 235484 298363 373231 1201499 baseline 653809 337059 631364 193253 2 137618 2 117860 8 490759 763234 110986 0 -57875 s.e. 254328 1 251518 1 270573 6 317882 9 347307 7 380232 2 393140 6 426033 5 483606 4 6000669 scenario 1 353901 788030 196046 140545 1 101910 6 530351 47128 413340 169112 8 176323 s.e. 247505 9 241068 5 255582 6 289040 6 332797 4 350623 4 373277 5 401788 8 448301 7 6098156 irexp actual 111239 134488 197054 260388 235238 261208 122375 155087 194850 610693 baseline 86759 128144 152419 180749 206906 207866 225355 190251 183278 612082 s.e. 46090 46387 47534 53072 51064 53496 53706 60049 53014 63026 scenario 1 78532 120113 138204 169730 194205 191684 210607 173976 173039 603892 s.e. 45263 45866 46397 47404 47280 47773 49995 53907 48096 60812 irimp actual 46985 7876 6205 7717 1369 917 4633 5906 8234 9944 baseline 98823 31597 -52485 -66917 -36401 -49132 -66666 -43403 101500 54936 s.e. 141048 143723 164024 190253 201540 218589 234663 251001 215611 291782 scenario 1 291764 239516 210658 227560 251176 251709 251855 275379 333432 344262 s.e. 106942 108506 106966 114738 117116 118803 115158 128777 109627 141848 irwprice actual 48.0 56.4 68.2 85.3 100.0 126.9 158.4 195.8 220.9 254.2 baseline 40.1 61.0 67.3 75.2 99.4 120.3 164.0 204.2 299.6 326.4 s.e. 11.9 18.1 20.1 24.9 34.1 45.5 64.3 82.5 133.1 173.7 scenario 1 41.0 63.2 69.3 77.4 101.7 126.0 168.3 207.1 312.5 331.3 s.e. 12.0 17.5 19.8 24.5 35.0 44.4 62.2 80.4 133.9 175.9 irycd actual 161487 61 161385 12 163539 46 175456 12 186972 03 193234 53 193831 95 219458 67 250817 25 2680118 8 baseline 153720 11 163360 36 165921 02 171142 71 185217 17 197391 88 209212 09 216503 77 241788 38 2694199 2 s.e. 106335 0 112759 7 111892 6 116522 8 125557 9 137305 3 146096 6 152440 8 178744 9 2046775 scenario 1 154090 91 163485 91 166378 95 171690 92 184886 99 198175 85 208916 87 216557 05 242470 13 2692123 2 s.e. 109221 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banking & finance and business comparative analysis on the sources of credit risk in nepalese commercial banks fatta bahadur k.c and indra kumar kattel comparative analysis on the sources of credit risk in nepalese commercial banks fatta bahadur k.c1 indra kumar kattel2 1 tribhuvan university, nepal 2mewar university, rajasthan, india correspondence: indra kumar kattel, rastriya banijya bank limited, central office singhdurbar plaza, kathmandu, 44600, nepal, email: indra.kattel2024@gmail.com received: september 24, 2017 accepted: september 26, 2017 online published: september 29, 2017 abstract the study was conducted to find out the significant differences between state-owned bank and private sector bank in the practice of measuring the sources of credit risk. this paper attempts to ascertain the perceptions of nepalese bankers about the importance of identification practice of credit risk sources within the specific borrowers. the result of the study indicates that the collaterals, characters, capacity, capital, condition, legality of the business, economy of the country, business environment and industrial relation were consider as a sources of credit risk in nepalese banking sector. the result shows that level of the credit risk sources were disparity the nepalese commercial banks. in addition, collaterals provided as a security by the borrower, characters of the borrower, capacity, legality of the business, economy of the country and industrial relation were found significant predictor for the sources of credit risk. moreover, there was a positive relationship between identification practice and sources of credit risk. keywords:credit, risk, identification, collaterals, characters, capacity, capital, condition, legality, economy 1. introduction credit risk is one of the most general risks that exist in the banking market and a major risk faced by financial institutions (duffie & singleton, 2003). credit risk normally refers to the risk that a borrower will default on any type of debt by failing to make payments which it is compelled to do. credit risk is the major risk that banks are exposed during the normal course of lending and credit underwriting. the credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its commitment in accordance with agreed terms (basel, 2000, p. 1). credit risk arises from non-performance by a borrower. for most banks, loans are the largest and most obvious source of credit risk, however, credit risk could stem from activities both on and off balance sheet. it may arise from either an inability or an unwillingness of the borrower to perform in the pre-committed contracted manner. in a bank’s portfolio, losses arise from outright default due to the inability or unwillingness of a customer or counter party to meet commitments in relation to lending, trading, settlement and other financial transactions. alternatively losses may result from a reduction in portfolio value due to actual or perceived deterioration in credit quality of the banks (nepal rastra bank, 2010). diwan & rodick (1992), suggested that high npls increase the uncertainty regarding the capital position of the banks and therefore tend to limit their access to additional financing in regular banking business. the shortfall of the lending fund contributes to lower credit growth. in certain banks, governments have large amounts of non-performing loans and some commercial banks tend to finance government fiscal deficits and sustain some unprofitable government projects with large borrowings from banks. these actions increase the prospects of generating npls in the banks. so, non-performing loans are one of the main reasons that cause insolvency of the financial institutions and ultimately destroy the whole economy (hou, 2007). by considering these facts, it is necessary to control non-performing loans for the financial soundness of banks; otherwise the capital can be jammed in unprofitable projects and sectors which not only damage the financial health of banks but also the economic stability of the country. credit risk management is a structured approach to manage uncertainties through risk assessment, development of strategies to manage it and mitigation of risk using managerial resources. the strategies include transferring the risk to another party, avoiding the risk, reducing the negative effects of the risk, and accepting some or all of the consequences of a particular risk (afriyie & akotey, 2012, p. 1). credit risk management in modern banking industry has gained a momentum due to the high degree of non-performing assets. credit risk is the most common cause of bank npa, causing virtually all regulatory environments to prescribe minimum values for credit risk management. the foundation of sound credit risk management is the identification of the existing and potential risks, inherent in lending activities entire the individual borrowers. measure to counteract, these risks normally comprise evidently clear policies that express the bank’s credit risk management philosophy and the parameter within which credit risk is to be controlled (greuning & bratanovic, 2003, p. 151). the three goals of credit risk measurement when extending the business credit are 1) for the lender to limit credit risk exposure, 2) to earn adequate compensation for the level of credit relative to facility amount, and 3) to mitigate credit risk from economic loss. to fulfill these goals bank and financial institutions have made the credit policy, guideline and create the appropriate credit culture. the assessment analysis a task is to measure the risk level and to find out what events could potentially cause harm or benefits for the banks. the risk is being assessed in terms of the sternness of the impact, likelihood of occurring and controllability (gray & larson, 2008, p. 215). risk assessment is done by prioritizing the risk either by using risk evaluation or risk analysis (williams, et al., 2006, p. 70). this risk analysis is based on the likelihood and consequences. likelihood depends on the probability that the risk will occur and how frequently it will take place. while, consequences on the other hand can be calculated by looking at the effects on results or on the enablers of results (williams, et al., 2006, p. 70). for this purpose, banks adopt the various assessment and analysis tools to know the frequency of incidence of the risk and its effect. hence, risk appraisal is then carried out when an appropriate risk analysis tools has been assumed. an assessment is done against an appropriate risk-acceptance criterion to give a risk level of the credit (williams, et al., 2006, p. 70). therefore, assessment and analysis is equally important for credit risk management practice on banking sectors. during the credit appraisal, banks try to find out risk level from the basic sources of credit risk. an examination of real risk assets allocation of banks conducted by mckinsey & company (1997) reveals that credit risk exposure takes up to 60.0% of risks that banks face while market risk and operational risk take 20.0% respectively. the acknowledgment, dimension, manage and supervision of credit risk are, therefore, very significant for banks. there is no financial institution that could avoid any types of risks. 1.1 objective of the research the major objective of the study is to analyze the practice of credit risk sources in some selected commercial banks operating in nepal. the key objective of this research is to ascertain relationship between identification practice and sources of credit risk in nepalese commercial banks. 1.2 hypothesis of the research to fulfill the predefined objectives of this study, the following hypotheses were developed and tested by using statistical tools. h1: there are significant differences between state-owned and private sector banks in the practice of measuring the sources of credit risk. h2: there is positive relationship between identification practice and sources of credit risk. 1.3 definition of key variables the major aim of credit analysis is to find out the risk level of the borrowers for credit decision. for this purpose the following factors will be considered either implicitly or explicitly during the credit risk analysis (joseph, 2014, pp. 24-25). for this purpose commercial banks use the five c principle for credit granting process. 1.3.1 character of the borrower character shows the integrity and honesty of the borrower to settle the dues in time. it is related that the history of credit has recorded several instances where the borrower had the capacity to repay but not the willingness. a banker takes an informed view about the character of the borrower through the study of ownership, management, business transactions as well as business history from the appropriate market enquires. the quality and reliability of the references will be checked for final consideration. the background and experience level of employees play the essential role to indentify the honesty and integrity of the borrowers. 1.3.2 capacity it is the borrower’s capacity to meet their debt service obligation studied during the credit decision. in the case of business lending this is done through the financial statements analysis. financial statements including interpretation of financial ratios that indicates the ability to pay. capacity to repay is the most serious of the five factors; it is the primary source of repayment–cash inflows and cash generated by the borrower. the prospective lender wants to identify exactly how the borrower intends to repay the loan. the bank will judge the cash flow from the business, the timing of the repayment of loan, and the probability of successful repayment. payment history on existing credit relationships personal or commercial is considered an indicator of future payment performance. the business is influenced by external factors such as government policy, economic policy, national income etc; it is necessary to assess the capacity of the borrower. so, bank will also want to know about other possible sources of repayment. 1.3.3 capital a bank would ensure that the borrower has a sufficient stake in the business. higher the capital contribution by the owner in the business is considered the better capacity, because a large involvement by the borrower will reduce the chance of default. 1.3.4 collaterals collaterals means the asset offered by the borrower to secure the loan, such as a property, to the lender with the agreement that it will be the repayment source in case the loan is not pay back from the established sources as per terms and conditions agreed for the financing. some lenders may require a guarantee in addition to collateral as security for a loan. collateral is considered the subsequent way out by the lender in case the credits become default. 1.3.5 conditions conditions cover terms and covenants included in the loan or credit facilities agreement letter. it describes the intended purpose of the loan and the conditions under which the credit is being granted. the bank must ensure that the loan agreement clauses are legally enforceable. instead of five c principle, legality of the business, economy of the country, business environment and industrial relation are also considered as key components for credit risk assessment. lack of the proper assessment, bank faces the risk from these area. so that collaterals, characters of the borrower, capacity, capital invested by the borrower in the business, condition, legality of the business, economy of the country, business environment and industrial relation are support to produce the credit risk in the bank. hence, it is considered sources of credit risk as independent variables. 2. literature review credit risk can be raised due to variety of reasons of both internal and external sources. according to nijskens (2011) and breuer, jandacka, rheinberger, & summer, (2010), the sources of credit risk includes poor governance and management control, inappropriate laws, limited institutional capacity, inappropriate credit policies, volatile interest rates, low capital and liquidity levels, directed lending, massive licensing of banks, poor loan underwriting, reckless lending, poor credit assessment, poor loan underwriting, laxity in credit assessment, poor lending practices, government interference, and inadequate supervision by the central bank. the literature has recognized these sources that could lead to credit risk in commercial bank. the levels of credit risk incurred fluctuate across sectors as well as countries also. credit risk is often considered as a consequence of systemic risk derived from the macroeconomic perspective. the factors influencing the systematic credit risk are macroeconomic factors, changes in economic policies, political changes and the goals of leading political parties macroeconomic factors include the inflation rate, the employment rate, growth in gross domestic product, stock index and exchange rate movements, and conjuncture fluctuations in the economy (aver, 2008, p. 318). changes in economic policies are signified by changes in monetary and fiscal policies, economic legislation changes, as well as trade policies of the country. the political changes or changes in the goals of leading political parties also influence the systematic risk. all these factors can have an important influence on the likelihood of borrowers debt servicing capacity, but as changes in economic policies and political changes are difficult to examine, the literature has mainly focused on the macroeconomic factors only. there are also internal factors that can cause credit risk of bank and financial institutions. deficiencies of techno economic appraisal of loan proposal, inadequately define lending policies, lack of post sanction monitoring system, inadequate value of the securities, over optimistic assessment, liberal loan sanctioning power, lack of knowledge and skills of credit relationship officers, lack of adequate and reliable information, lack of proper coordination of various department, lack of well defined organization structures, lack of proper credit scoring and rating system and lack of reliability and integrity of the data etc. are the major factors related to the bank that influence to increase the credit risk (bidani, 2010, pp. 31-32). according to koopman and lucas (2005), making a distinction between idiosyncratic and systematic risks, the individual risk factors are intrinsic to individual characteristics of borrowers. the systematic risk is most significant at the loan portfolio level, and the systematic credit risk issues are usually thought to correlate with macroeconomic conditions. the loan portfolios are generally exposed to a counterparty credit risk and asset value risk, which is provisional in the occurrence of credit default events (mileris, 2012, p. 86). credit default and asset value risk are highly interdependent. during economic declines the asset values decrease and credit default events increase; this enlarges the realized loss rates (rosch & scheule, 2010). one of the major indicators of credit risk is ratio of npls to total loans portfolio. if a bank can establish a link between the macroeconomic environment and systematic credit risk factors, this knowledge may help in assessing and managing the portfolio credit risk over time and may prove useful in dynamic credit risk management circumstances in which default scenarios can occur over a variety of economic conditions (koopman & lucas, 2005; wang, 2013). according to wang (2013), it is necessary to the bank and financial institutions to have well-capitalized, service to a wide range of customers, sharing of information about borrowers, stabilization of interest rates, reduction in non-performing loans, increased bank deposits, increased credit extended to borrowers, increased service quality and maintained adequate level of corporate governance to minimize the impacts of credit risk factors. nonperforming and default loans need to be reduced for sound performance of the bank. because credit risk is inherent throughout the entire credit process, the nature and sources of credit risks have to be identified and measured to prevent losses. bagchi (2003) scrutinized the credit risk management in banks in india. he examined risk identification, risk measurement, risk monitoring, and risk control and risk audit as basic considerations for credit risk management in banks. he concluded that proper credit risk structural design, policies, procedures and framework of credit risk management, credit rating system, monitoring and control contributes in success of credit risk management system in banking industry. al-tamini & al-mazrooei (2007) conducted the comparative study on risk management of uae national bank and foreign bank. they found that foreign exchange risk, credit risk and operating risk were facing by the uae commercial banks. they also found that the uae banks were somewhat efficient in managing risk, and risk identification and risk assessment and analysis were the most influencing variables in risk management practices. finally, the results indicated that there was a significant difference between the uae national and foreign banks in the practice of risk assessment and analysis, and in risk monitoring and controlling. das & das (2007) evaluated the credit risk management practices in bangladesh. the study identified the importance of credit risk management of commercial banks and then tries to find out the existing procedures for credit risk management that were followed by the different commercial banks in bangladesh. the future of banking depends on the risk management dynamics. those banks that have effective risk management mechanism survive in the market in the long term. the effective management of credit risk is a serious component of comprehensive risk management essential for long term success of a banking institution. from the result they found that the existing procedures of credit management were not adequate to compete with the complex financial and economic environment. alam & masukujjaman (2011) examined the risk management practices of commercial banks in bangladesh based on five commercial banks operating in bangladesh. the research revealed that credit, market and operational risk are the major risks in commercial banks which are managed through three layers of management structure. the board of directors performs the responsibility of the main risk oversight; the executive committee observes risk and the audit committee supervise all the activities of banking operations. in the circumstance of views regarding use of risk management techniques, it was found that internal rating system and risk adjusted rate of return on capital are comparatively more significant techniques used by commercial banks in bangladesh. abdelrahim (2013) conducted the research on effectiveness of credit risk management of saudi bank in light of global financial crisis with the objective of examine the determinants, challenges and developing means of credit risk managements. the study recommended that an overall strategy for effective credit risk management of saudi banks based on enhancing capital adequacy, improvement asset quality, intensification management soundness, increasing earnings, having adequate liquidity and dropping sensitivity to market risk besides hedging credit risk; having adequate provisions for downgraded loans; renegotiating loan terms and conditions, transferring credit risk to a third party, extending credit maturity by rescheduling and lowering interest rate on insolvent loan. poudel (2013) investigated the macroeconomic determinants of credit risk in nepalese banking sector by using time series modelling. secondary data were used between the periods of 2001-2011 from the annual financial statements. this study found that the credit risk of banks was significantly affected by inflation and foreign exchange fluctuation negatively. however, other macroeconomic variable gdp growth, broad money supply growth, market interest rate had no any influence in credit risk in the nepalese banking sector during the analysed period. imbierowicz & rauch (2014) investigated the relationship between the two major sources of bank default risk: liquidity risk and credit risk. result of the research showed that both risk categories do not have an economically meaningful reciprocal contemporary or time-lagged relationship. though, they do influence banks’ probability of default. this effect is two folded: whereas both risks separately increase the pd, the influence of their interaction depends on the overall level of bank risk and can either aggravate or mitigate default risk. these results provided new insights into the understanding of bank risk, as developed by the body of literature on bank stability risk in general and credit and liquidity risk in particular. timsina (2014) examined the impact of commercial bank credit to the private sector on the economic growth in nepal from supply side perspectives. the empirical results showed that bank credit to the private sector had positive impacts on the economic growth in nepal only in the long run. however, in the short run, it observed a feedback effect from economic growth to private sector credit. research method and materials in order to find answers to the research questions useful different methods and instruments were used to collect data. the researcher has chosen the survey as the appropriate research design for the study, and as such, questionnaires were used as research instruments. a sample of 6 commercial banks randomly chosen was used in this analysis. ten questionnaires were used to gather data with about two categories of banks like state owned and private sector banks. a chosen. descriptive statistics, anova and regression used to analyze the data. to ensure accuracy, internal consistency and completeness, reliability of the instrument was established using cronbach’s alpha coefficient test (cronbach, 1946). the choice of this indicator was influenced by the simplicity and its prominence in banking risk literature. the higher generated score is more reliable. nunnaly (1978) has indicated 0.7 to be an acceptable reliability coefficient to measure the reliability but lower thresholds are sometimes used in the literature. in this case, the alpha (α) coefficients were 0.86, which is acceptable level. 3. result and discussion this section presents the findings obtained from the data analysis. this result is presented in two sub sections: descriptive statistical analysis and regression analysis. 3.1 descriptive statistical analysis as shown in the given table, there was found difference of mean value of the sources of credit risk such as collaterals, characters, capacity, capital, condition, legality of the business, economy of the country, business environment and industrial relation in state-owned and private sector banks in nepal. the result indicates that sources of credit are different level in the nepalese commercial banks. table-1: descriptive statistics of credit risk measuring techniques source: survey data 2015, sob= state-owned banks, psb = public sector banks, the one way anova has been used to see the any differences between state-owned banks and private sector banks in the analysis of the collaterals against the bank loan. it demonstrated the model was significant (p<0.05) with f value 148.216 at one degree of freedom. similarly, there was significant differences (p<0.05) in the analysis of the characters of the borrower between state-owned bank and private banks with f value 30.428 at one degree of freedom. the analysis of variance (anova) of capacity of the borrowers shows that f value is 23.913 at significant level (p<0.05) suggesting that there was a significant differences between two group of banks. similarly, anova of capital of the borrower demonstrated that there was significant (p<0.05) differences with f value 22.682 at one degree of freedom. table 2 analysis of variance   sum of squares df mean square f sig. collaterals between groups 20.754 1 20.754 148.216 0 within groups 52.93 378 0.14     total 73.684 379       characters between groups 5.275 1 5.275 30.428 0 within groups 65.525 378 0.173     total 70.8 379       capacity between groups 4.318 1 4.318 23.913 0 within groups 68.258 378 0.181     total 72.576 379       capital between groups 4.301 1 4.301 22.682 0 within groups 71.685 378 0.19     total 75.987 379       condition between groups 4.629 1 4.629 26.207 0 within groups 66.768 378 0.177     total 71.397 379       legality between groups 4.326 1 4.326 24.602 0 within groups 66.474 378 0.176     total 70.8 379       economy between groups 4.96 1 4.96 35.111 0 within groups 53.398 378 0.141     total 58.358 379       environment between groups 5.958 1 5.958 20.706 0 within groups 108.768 378 0.288     total 114.726 379       industrial relation between groups 53.731 1 53.731 77.057 0 within groups 263.574 378 0.697     total 317.305 379       the analysis of variance (anova) of condition of borrower shows that f value is 26.207 at significant level (p<0.05) symptomatic of significant differences between two group of banks. similarly, anova of legality of the business demonstrated that there was significant (p<0.05) differences with f value 24.602 at one degree of freedom. the analysis of variance (anova) of the economy, environment and industrial relation demonstrated that the model was significant (p<0.05) with f value 35.11, 20.76 and 77.057 at one degree of freedom respectively. from the above statistical explanation, we conclude that there are significant differences between state-owned banks and private sector banks in the analysis the sources of credit risk. hence h1 is accepted. 3.2 regression analysis table 3: model summary model r r square adjusted r square std. error of the estimate 1 .519a 0.269 0.251 0.38 a. predictors: (constant), industrial relation, collateral, capital, environment, clients’ characters, economy of the country, legality of business, condition, capacity in the model shows that when the independent and dependent variables interact, the model has been pearson's correlation coefficients (r) is 0.519 and coefficient of determinates (r square) of 0.269, signifies positive and strong connection between two. table 4 :anova model sum of squares df mean square f sig. 1 regression 19.683 9 2.187 15.118 .000b residual 53.525 370 0.145     total 73.208 379       a. dependent variable: identification practice b. predictors: (constant), industrial relation, collateral, capital, environment, clients’ characters, economy of the country, legality of business, condition, capacity the analysis of variance (anova) shows that f value is 15.118 at .00 significant level ( p<0.05) suggesting that the relationship identification practice and its explanatory variables is positive. hence, h2 is accepted. while going through the every variable given in the above table, it was found out that capital condition and environment were not significant in the model. similarly, no any variable was excluded from the model due to the absence of homogeneity. collaterals provided as a security by the borrower, characters of the borrower, capacity, legality of the business, economy of the country and industrial relation were found significant variables during the analysis. industrial relation is variable that makes the significant contribution to explaining the identification of risk level when other remaining variables are controlled for with beta coefficient of 0.224. industrial relation plays an important role to categorize the credit risk. similarly, significant contribution also found to make by economy of the country with the beta coefficient of 0.345, and condition of the borrower with the beta value of 0.171, while keeping all other variables constant. table 5: coefficients model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 0.941 0.106   8.9 0 collaterals -0.187 0.047 -0.187 -3.937 0 characters -0.128 0.16 -0.126 -0.8 0.024 capacity 0.097 0.206 0.097 0.473 0.037 capital 0.022 0.086 0.022 0.253 0.8 condition 0.173 0.189 0.171 0.914 0.361 legality 0.007 0.158 0.007 0.045 0.016 economy 0.387 0.102 0.345 3.805 0 environment -0.113 0.058 -0.142 -1.954 0.051 industrial relation 0.108 0.023 0.224 4.609 0 a. dependent variable: identification practice more important, capacity of the borrower was the variable with beta coefficient (0.97), collateral was the variable with beta coefficient (-0.187) and character with beta coefficient (-0.126566) were found significant predictor for credit risk measurement. 4. conclusion an identification source of the credit risk is very important phenomena in the risk management practice. it helps to evaluate the credit risk level of the every borrower as well as portfolio level of the banks. sources of the credit risk unbounded terms. the most common sources like collaterals provided by the borrower as a security, character of the borrower, capacity, capital, and condition, legality of the business, economic condition, environment and industrial relation are grouped and discuss in this paper. these sources are differently utilized by the banks on the basis of market strategy, credit culture and philosophy. hence, the identification practice of risk sources was significantly different in state-owned and private sector banks in nepal. in the credit appraisal processes, the banks shall be determined any untrustworthy activities on the part of the borrower to know the risk level. the bank is always trying to improve their credit risk measuring tools and techniques in their credit policy for the quality of lending and various measures are undertaken to follow the effective credit management system. this requires adequate training to the employees to enhance the skills. more risk analyst may be recruited improve the quality of the credit exposure. in this research, the limited source of the credit risk is considered as a primary data. the statistical result obtained through primary data analysis is not correlated using the secondary data. this may be the prospective area for future researcher in banking sector. references abdelrahim, k. e. 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(1997). credit portfolio view. new york: mackinsey inc. mileris, r. (2012). the effect of maccro economic coditio of macroeconomic conditions on loan portfolio credit risk and banking system interest income. economica , 91 (3), 85-100. nepal rastra bank. (2010, july). risk management guidelines. nepal rastra bank, bank supervision department. nijskens, r. (2011). credit risk transfer activities and systemic risk: how banks became less risky individually but posed greater risks to the financial system at the same time. journal of banking & finance , 35 (6), 1391-1398. poudel, r. p. (2013). macroeconomic determinants of credit risk in nepalese banking industry. 21st international business research conference 10 11 june. ryerson university, toronto, canada. rosch, d., & scheule, h. (2010). downturn credit portfolio risk, regulatory capital and prudential incentives. international review of finance , 10 (2), 185–207. timilsina, n. (2014). bank credit and economic growth in nepal: an empirical analysis. nrb working paper series, nrb-wp-22 . kathmndu: nepal rastra bank, available at www.nrb.org.np. wang, y. (2013). credit risk management in rural commercial banks in china( doctoral dissertataion),retrived from http://researchrepository.napier.ac.uk/id/eprint/6659. williams, r., bertsch, b., dale, b., wiele, t. v., iwaarden, j. v., smith, m., et al. (2006). quality and risk management: what are the key issues. the tqm magazine , 18 (1), 67-86. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. 17 27 copyright © cc-by-nc 2020, cribfb | asfbr asian finance & banking review; vol. 4, no. 1; 2020 issn 2576-1161 e-issn 2576-1188 published by centre for research on islamic banking & finance and business, usa 1 accounting information and stock prices of quoted manufacturing firms: multi-variant panel data evidence from nigeria okoro innocent department of accounting faculty of management sciences university of port harcourt, rivers state, nigeria e-mail: innocentokoro35@yahoo.com e.a.l. ibanichuka department of accounting faculty of management sciences university of port harcourt, rivers state, nigeria l.c. micah department of accounting faculty of management sciences university of port harcourt, rivers state, nigeria abstract this study the relationship between accounting information and the stock prices of quoted firms in nigeria. the general objective was to examine if accounting information have any effect on market value of quoted firms. cross sectional data was sourced from financial statement of 23 manufacturing firm from 2008-2017. stock price of the firms was modeled as a function of assets turnover rate, book value per share and debt equity ratio. ordinary least square method of cointgration, unit root and granger causality test was used to determine the extent to which human resource cost affect quality of financial report. after cross examination of the validity of the pooled effect, fixed effect and the random effect, the study accepts the fixed effect model. the study found that the independent variables explained 78 percent variation on the market value of the quoted firms. the beta coefficient of the variables indicates debt equity ratio and assets turnover rate have positive effect on the stock prices of the quoted firms while book value per share have negative effect on the stock prices of the manufacturing firms. from the regression summary, the study concludes that there is significant relationship between accounting information and prices of the quoted firms. the study recommends that management of the manufacturing firms should formulate policies that will increase book value per share and internal and external factors that affect negatively the book value per share of the firms should be discouraged. keywords: accounting information, market value, quoted manufacturing firms, panel data, nigeria. 1. introduction prior to the deregulation of stock market in nigeria, stock prices of newly issued and existing stocks were regulated by the regulatory agent of the market, the nigerian securities and exchange commission, without reference to internal factors such as financial information that can affect stock prices of listed firms. stock prices in the nigerian stock exchange moves up and down in response to news and information expected about the particular stock in the market. the news and information cause buyers and sellers of common stocks to take buying and selling decisions which generate market activities that affect market value (aflbi and dada, 2014). stock price constitute the value of a firm (pandey, 2005). the effect of stock volatility arising from the role of accounting information disclosure in mitigating uncertainty, accounting disclosures may reduce the magnitude of the impact of news about a firm’s performance, which would reduce stock price volatility (lang and lundholm 1993; bushee and noe 2000). retrospectively, the market microstructure theory also suggest that by increasing the amount of public information, disclosure is likely to reduce information asymmetries in the market that result in pronounced price changes in response to changes in demand for the stock (diamond and verrecchia 1991). copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 2 disclosure reduces heterogeneity of beliefs about the true value of the firm. it may thus reduce both the volume traded and the volatility of the stock price. an increase in disclosure implies that more information is released, which in and of itself might move the price and increase volatility (ross 1989). an increase in the disclosure of information relies on sophisticated investors to interpret and put the disclosed information into context. indeed specific disclosure requirements could provide the markets with more data that might be misconstrued by analysts. more disclosure might thus inject more market volatility (institute of international finance 2003; shleifer and vishny 1997). in nigeria, section 296 of companies and allied matter act 1990 (as amended) mandates all public limited companies to make public the financial status of the firm within a specific accounting period. the role of management as agent to the shareholders gives it obligation to be accountable to the owners. management is responsible for the preparation of financial statement based on the accounting records of the organization which reflects the nature and operations of the entity and expected to be in conformity with generally accepted accounting principle (gaap). the need for financial reporting and disclosure arises from information asymmetry and conflict of interest between managers and shareholders (healy and palepa, 2006).according to international accounting standard board (iasb), (2008), high quality financial reporting is critical to investors and other stakeholders in making investment, credit and similar decision. the need for adequate fair, reliable, relevant, timely and unbiased financial information is irrefutable in a free enterprise economy. information is related to various theories such as stakeholder theory (choi, 1973), agency theory (piot, 2005, and stulz 2005), legitimacy theory (deegan, 2002 and tsang, 1998) and political economy theory (choi, 1973). information dissemination is an important and effective tool of coordinating all those groups to bring them together. beuselinck (2005) clearly evidences quoting other relevant theories linked to economic functions that financial reporting quality is prime to wellfunctioning of the economy. the development of accounting theory originated in the united states as a result of the corporate scandals in the early 1900s and later was influenced by the establishment of professional accounting bodies in the united state and the united kingdom that published documents relating to accounting principles and standards for financial statements (schroeder, et al., 2011). mandatory disclosure of reported financial statements is an important source of information with significant economic implications for investors, creditors, firms and other users. the usefulness of financial information for investor decision-making process has been the focus of many researchers since the 1960s. accounting information, such as that conveyed in publicly disclosed accounting reports, is also critical to the analysis of temporal liquidity positions of equity markets. disclosure of accounting information arguably reduces information asymmetries amongst investors (amihud and mendelson, 1986). as argued by black (2000) and ball (2001) timely financial accounting disclosure system that is a prerequisite to the very existence of efficient stock markets in which stock prices to a considerable extent reflects all public information and incorporates private information as well as communicate the information set to managers, current and potential investors. accounting information plays a very important role in our society for making efficient business decisions. however according to the international accounting standard board an accounting standard board general purpose financial reports are not designed to show the value of a reporting entity; but they provide information to help existing and potential investors, lenders, and other creditors to estimate the value of the reporting entity (fasb, 2010). investors and other users of financial reports rely on models derived from finance theories to make investment decisions. there are numerous theories relating to the decision-making process of equity investors, this includes the capital asset pricing model and fundamental analysis models, among others. the asymmetric information theory financial markets are especially characterized by informational differences between buyers and sellers. private information and modeling it to financial economics created another perspective on financial information as determinants of market value most especially in the developing financial markets like nigeria whose degree of market imperfection is close to unitary. these theories proclaim that insiders, such as management, are assumed to possess superior, private information about the firm’s characteristics concerning income stream as well as investment opportunities. therefore this study examined the effect of accounting information on the market value of quoted manufacturing firms in nigeria. 2. literature review 2.1 accounting information accounting information can be seen as the outcome of accounting systems that measure and routinely disclose audited, quantitative data concerning the financial position and performance of an enterprise. audited balance sheets, income statements, and cash-flow statements, along with supporting disclosures, form the foundation of the financial accounting reports to investors and indeed a wide range of accounting information users. financial statements have the ability to perform a number of functions. they basically provide financial aid to managers in decision making, measurement or evaluation of a firm’s performance, and copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 3 also to portray a firm’s value. thus, for disclosed financial information to be useful, it must be relevant and faithfully represent what it purports to represent. the usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable (conceptual framework, 2010). financial information supplies a key quantitative representation of individual corporation that supports a wide range of contractual relationships. according to the american institute of certified public accountants (aicpa. 2005), financial statements must properly reflect the organization’s financial and economic reality, so that the users are not induced to take decisions on misleading information. financial information also enhances the information environment of the reporting entity and those associated with it. the quality of financial disclosure can impact on firms’ cash flows directly, in addition to influencing the cost of capital at which the cash flows are discounted. financial information, such as that conveyed in publicly disclosed accounting reports, is also critical to the analysis of temporal liquidity positions of equity markets. financial information is information which describes an account for a utility. it processes financial transactions to provide external reporting to outside parties such as to stockholders, investors, creditors, and government agencies etc. for financial reporting to be effective, accounting information should be completed as relevant and reliable (hendricks, 1976). the primary purpose of the financial statements is to provide information about a company in order to make better decisions particularly the investors (germon and meek, 2001). 2.2 the concept of stock price stock price is the cost of purchasing a security on an exchange. it is affected by a number of factors including volatility in the market, current economic conditions, and popularity of the company. according to ronen and yaari (2008), the invention of double entry book keeping in the 14th century led to company’s valuation which is based upon ratios such as price per unit of earnings (from income statement), price per unit of net worth (from balance sheet) and price per unit of cash flow (cash flow statement). the next advance was to price individual price shares rather than the whole company. a price per dividend was the next advancement. analysts find it appropriate to use discounted cash flow that is based on time value of money to estimate the intrinsic value of share rather than price per dividend of share prices. stock price is based on supply and demand. it is used to refer to as a company’s market capitalization value. it is calculated by multiplying the number of shares issued by the price of the company's share. a company's share price is determined by daily trading between buyers and sellers on the relevant stock exchange. market prices are easy to determine for assets as the constituent values, such as stock and futures prices, are readily available. a valuation would have to be prepared using different methods (ngerebo-a, 2007). stock price is the value of an asset/security as determined by the forces of demand for and supply of the assets. it is the perceived or observed value of an asset on the market. it is also known as current value. it is in fact the mutually accepted worth (cost or price depending on the individual) of the asset after negotiation. most assets that have market values have their values determined by specialized markets such as the stock exchange. the acceptance of any asset depends on the perception of the potential investor after comparing the stock price to the intrinsic value. an asset is undervalued or under-price or favorably priced if the market value of the asset is less than the intrinsic value. if the intrinsic value of the asset is less the market value, then the asset is overvalued, over-priced or favorably priced. where the latter occurs, the investor would ordinarily be acquiring an asset at more expensive value than he would ordinarily have paid. an investor would acquire an overpriced asset if he expects the asset to record a bullish price movement such that if the anticipated price movement crystallizes, the investor can make capital gain. 2.3 asset turnover ratio assets turnover defined as the efficiency ratio which demonstrates the efficiency utilization of company’s assets in generating company’s sales. by using formula given by malik and ali (2013) assets turnover ratio calculated by taking sales divided by total assets. as explained by malik and ali (2013) firms found to be more efficient in utilizing its assets and generate sales when its assets turnover ratio reported to be high. they also said when the company reported high ratio of asset turnover lead to an increase in company’s profit and make the ratio to have positive and significant relationship with share price and this is witnessed in their own study by using a sample of 21 public companies from fuel and energy sector listed in karachi stock exchange (kse). ozlen (2014) reported total assets turnover ratio to have negative and significant relationship with share price of metal-product and stone sectors listed in istanbul stock exchange but positive and significant relationship exist with share price of stone sector, metal products sector, transportation sector and commerce sector. http://www.investopedia.com/university/economics/economics3.asp http://www.investopedia.com/terms/m/marketcapitalization.asp copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 4 2.4 debt to equity ratio the debt-to-equity ratio is a financial ratio that shows the relative share of capital and debt used to finance the company's assets; this link is also known as risk, leverage or leverage." some academics have had an impact on this dividend policy for companies. companies with high growth rates and high dividend payouts use debt and high-leverage companies compared to their respective industries. however, there is contradictory evidence in the relationship between dividend payment rates and leverage. in some industries, payment rates and leverage are positively linked, while in other industries the ratio is negative. there is a statistically significant and negative relationship between risk and market value of a company. it is clear that higher risk companies pay dividends at a lower rate, which affects the market value of the companies. 2.5 dividend per share dividend per share is the sum of declared dividends issued by a company for every ordinary share outstanding; the figure is calculated by dividing the total dividends paid out by a business, including interim dividends, over a period of time by the number of outstanding ordinary share issued; a company's dividend per share is often derived using the dividend paid in the most recent quarter, which is also used to calculate the dividend yield;dividend per share is an important metric to investors because the amount a firm pays out in dividends directly translates to income for the shareholder, and the dividend per share is the most straightforward figure an investor can use to calculate his or her dividend payments from owning shares of a stock over time (pandey, 2015). at the same time, a growing dividend per share may also be a sign that the company's management believes that its earnings growth will be sustained. for the correct calculation of dividends per share, including interim dividends, dividends for the entire year, except special dividends, must be included; special dividends are dividends that are expected to be issued only once and are therefore not included; temporary dividends are dividends distributed to shareholders that have been declared and paid before the enterprise has determined its annual profit; if an entity has issued ordinary shares during the calculation period, the total number of ordinary shares outstanding is calculated over the reporting period on the basis of the weighted average number of shares, which is the same as that used for the share. 2.6 theoretical review the theoretical approach to the relationship between financial accounting information and equity share investment can be discussed in terms of, accounting theories and theory of equity share investment. there are many financial accountingtheories. theories of financial accounting consider such things as people’s behavioror people’s needs as regards financial accounting information, or the reasonswhy people within organizations might elect to supply particular information toparticular stakeholder groups (deegan, 2006). this study looks at efficient-market hypothesis (emh), information perspective theory, accounting theory, decision usefulness theory of accounting information and signaling theory ofaccounting information among others theories. 2.7 efficient market hypothesis efficient-market hypothesis (emh) asserts that financial market is informationally efficient. there are three major forms of the hypothesis: "weak" semi-strong", and "strong". weak emh claims that prices on traded assets (for example, stock bonds, or property) already reflect all past publicly available information. semi-strong emh states that prices reflect all publicly available information and that prices instantly change to reflect new public information. strong emh additionally claims that prices instantly reflect even hidden or "insider" information. efficient market theory implies that market will react quickly to new information (goddy, 2010). thus, it is important to know when the accounting report first became publicly known. the accounting report is informative only if it provides data not previously known by the market. 2.8 information perspective informational perspective measures the usefulness of accounting information to individual users without much emphasis on the precise structure of the relationship between accounting data and firm value (bernard, 1995). most of the studies on information perspective assume that information content or usefulness can be determined by observing stock market reactions to specific accounting information items (ball and brown, 1968, benston, 1967 and anderson, 1975). these studies further assert that the degree of usefulness can be measured by the extent of volume or price change following release of the information. until the last few years, the information perspective has dominated financial accounting theory and practice. the information perspective relies on a single-person decision theory, where it is the responsibility of an investor to predict future firm performance and make investment decisions. it also depends on efficient securities market theory, where the market can interpret information from any source (beaver, 1973). in this theory, it is accountant’s role to supply useful financial statement information to assist investors. ball and brown (1968) study is the first to document statistically a share price response to reported net income and their methodology is still employed today. the emphasis of information perspective is on copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 5 contemporary associations between accounting earnings (or book value) and market returns or prices. in particular, it investigates capital market reactions to public disclosures such as earnings announcements, other firm-specific news and economy-wide macroeconomic news. this is synonymous with information content school. 2.9 accounting theory accounting theory is defined as the basic assumptions, definitions, principles, and concepts that underlie accounting rule made by a legislative body and it also includes the reporting of accounting and financial information (deegan, 2006). the basic theories of accounting are held together by the conceptual framework of accounting. the conceptual framework establishes objectives of financial reporting by businesses. by understanding how some basic accounting theories fit into the conceptual framework, one can determine the theoretical underpinnings of financial accounting rules and principles (freedman, 2015). financial accounting standards board (fasb, 1976) defines accounting theory as acoherent system of interrelated objectives and fundamentals that can lead toconsistent standards. watts and zimmerman (1986) posit that accounting theory seeks to explain and predict accounting practice. hendriksen (1982) describes an accounting theory as logical reasoning in the form of abroad set of principles that (1) provide a general frame of reference by which accounting practice can be evaluated and (2) guide the development of new practices and procedures. according to him, an accounting theory should provide a general frame of reference against which sound accounting practices can be evaluated. a theory encompasses a set of statements or propositions connected by rules of logic or inferential reasoning. the statements must include testable hypotheses or premises and a conclusion, although one or more of the premises may be based on explicit value judgments. the primary test of a theory, however, is its ability to explain or predict (quintus, 2007). 2.10 empirical review wang et al (2013) empirically analyzes the relationship between accounting information, stock price and investor’s decision making with a few accounting information indexes, based on 60 listed companies in shanghai stock exchange for 2011. the results of their study show that a positive relationship exists between accounting information and stock price, and that the accounting information of the listed companies has an important effect on the quoted companies‟ stock price and investors’ behaviour in the market, but the significant degree varies. earnings per share and return on equity have the most significant correlation with stock price and investors decisions. vijitha and nimalathasan (2014) examined the relevance of accounting information such as earning per share (eps), net assets value per share (navps), return on equity (roe) and price earnings ratio (p/r) to investors investment decision in listed manufacturing companies in colombo stock exchange (cse), sri lanka. findings of their research revealed that accounting information has the significant impact on investors‟ investment decision and accounting information is significantly correlated with equity share investment decision. shehzad and ismail (2014) investigated the relevance of accounting information in banking sector of pakistan. the study employed the pooled regression technique on nineteen private banks from the period of 2008 to 2012. their findings showed that earning per share are more value relevant than book value, and that accounting data explains a high proportion of the investor’s equity share investment decisions. glezakos, mylonakis, and kafouros (2012) studied the impact of earnings and book value on the stock prices and investors investment decisions of a sample of 38 companies listed in the athens stock market during the 1996-2008 periods. the results concluded that the joint explanatory power of the above parameters in the formation of stock prices increases over time. the study further claimed that the impact of earnings is diminishing, compared to the book value, while investors strive towards analyzing the fundamental parameters of businesses. sanjeet (2011) carried out a study on the determinants of equity share investment decision in india. the study examine the empirical relationship between equity share prices and explanatory variables such as: book value per share, dividend per share, earnings per share, priceearnings ratio, dividend yield, dividend pay-out, size in terms of sale and net worth for the period 1993-94 to 2008-09. the results revealed that earning per share, dividend per share and book value per share has significant impact on the equity share investment decision. further, results of study indicated that dividend per share and earnings per share being the strongest determinants of equity share investment. alshubiri (2010) carried out a study of the determinants of equity share investment at amman stock exchange, jordan. the sample of their study includes the 14 commercial banks of amman stock exchange for the period 2005 -2008. simple and multiple regression analyses were conducted to find out the relationship between microeconomic factors and the equity investment. the result of the study showed that there is highly positive significant relationship between equity share investment and net asset value per share; market price of stock dividend percentage, gross domestic product, and negative significant relationship on inflation and lending interest rate but not always significant on some years of amman stock exchange in jordan. copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 6 suward (2009) investigated the nature of the relationship between accounting numbers and equity share investment in firms listed on the jakarta stock exchange for the period 1992-2001. the study used dynamic modeling principles in addition to the more usual cross sectional analysis. the results of this study show that the accompanying equilibrium correlation relationship between equity share investment and book values for firms listed on the jakarta stock exchange (jsx) can often be identified using accounting regressors. the result of the study showed that in indonesia, compared to similar models estimated using us data, the book value of net assets seems to have a stronger relationship with stock investment. and it was argued that this may be a function of the relative importance of financial statements as a source of information on the jsx. kiremu, galo, wagala, and mutegi (2013) conducted study on the effect of annual earnings announcement at the nairobi securities exchange (nse) by analyzing changes in share prices and trading volumes for the period from 2006 to 2010. abnormal returns during the event window of 91 days were determined using the event study methodology employing the market model on data from 5 listed companies. further, the volume reactions were examined by use of the trading activity ratio (tar). inferential and descriptive statistics were used to test for significant effect on tar and price changes. the results obtained indicate that the abnormal returns and tar were not significant at 5% probability level. thus the nse is of semistrong efficiency, whereby it is not possible to earn abnormal returns in the nse using the publicly available information according to oyerinde (2011) found little known about the role of accounting information in terms of its ability to explain changes to the security prices and equity share investment of listed companies on the nigerian stock exchange (nse). almost all evidence in this area is obtained from the united states or western european countries which have sophisticated markets compared to most developing countries. uwuigbe, olowe, and godswill (2012) examined the determinants of share prices in the nigerian stock exchange market. a total of 30 listed firms in the nigerian stock exchange market were selected and analyzed for the study using the judgmental sampling technique. the study basically modelled the effects of financial performance, dividend pay-out, and financial leverage on the share price of listed firms operating in the nigerian stock exchange market using the regression analysis method. the results of the study revealed a significant positive relationship between firms‟ financial performance and the market value of share prices of the listed firms in nigeria. consequently, they concluded that firms financial performance, dividend pay-outs, and financial leverage are strong determinants of the market value of share prices, which thus influenced equity share investment decision making in the listed companies in nigeria. pyemo (2011) examined the stock market reaction to annual earnings information releases using data on the nigerian stock exchange. using the event study method, the speed of reaction of the market to annual earnings informat ion releases for a sample of 16 firms listed on the exchange is tested. significant abnormal price reactions around earnings announcements suggest the earnings announcements contain value-relevant information. the study found that the magnitude of the cumulative abnormal returns is dominated by significant reactions 20 days before the earnings release date which suggests that a portion of the market reaction may be due to private acquisition and, possibly, abuse of information by insiders. the persistent downward drift of the cumulative abnormal returns, 20 days after the announcements is inconsistent with the efficient markets hypothesis, and therefore suggests that the nigerian stock market does not efficiently adjust to earnings information for the sample firms within the study period. olugbenga and atanda (2014) examined relationship between financial accounting information and market values of quoted firms in nigeria examined value relevance of accounting information in the nigerian stock exchange market with a view to determining whether accounting information has the ability to significantly affect share prices and investors‟ investment decisions in quoted firms. the findings of their study revealed that there is a significant relationship between accounting information and share prices of firms listed on nigerian stock exchange. they asserted that information on earnings, book value, dividend, and cash flows can be used to predict share prices of firms in nigeria. oshodin and mgbame (2014) conducted a comparative study on the relevance of accounting information in the nigeria banking and petroleum sectors. 10 companies where randomly selected from each of these sectors. data were collected on the market price per share (dependent variable), earning per share, book value of equity, and leverage (independent variables) for the period 2007-2011, from the annual financial reports of the selected companies. the study hypothesized that there is no difference in the value relevance of accounting information in both the banking and oil and gas sectors. the study compares the value relevance of accounting numbers in these sectors. the study revealed that the earnings per share information is the most considered by investors when deciding the share price and that the financial information in the oil and gas is more relevant compare to the financial information disclosed by companies in the banking sector. srinivasan (2012) conducted a study on the determinants of equity share prices in india. the study employs panel data consisting of annual time series data over the period 2006-2011 and cross-section data pertaining to 6 major sectors of the indian economy. he claims that accounting information data of the industry are essential and immense helpful to investors and analysts in assessing the better stocks that belong to different industry groups. accounting data provide critical information to shareholders and or investors as far as the company’s past performance is concerned, and are used extensively in forecasting future performance and valuations of equity. copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 7 eleke and opoku (2013) stated that accounting information released to the general public by firms directly or indirectly has a major influence on investors’ perceptions of the business, hence its value and both individual and institutional investors attach great importance to 3 information in the selection of portfolios of equity securities, bonds and other investments this study carried out an investigation into the relationship between accounting information and equity share investment in listed companies in nigeria with a view to providing accounting information that will aid investors equity share investment decisions. override (2011) stated that in the wake of the recent accounting scandals and economic meltdown where billions of naira of investment and retirement wealth has disappeared, the very integrity and survivability of the relevance of accounting information has been called to question. mahmoudi, shirkavand, and salari (2011) examined the investor’s reactions to the announcement of earnings in the tehran stock exchange in iran. this study investigated the overreaction and under reaction of investors towards positive and negative earnings announcement dividing the sample into two groups. the first group contains firms which increased their eps more than 5% rather than the previous eps announcements. group 2 contains firms which decreased their eps more than 5% in comparison to the latest announcements. the results indicate that there is a statistically significant market reaction on the eps announcement day. earnings increases induce a significant positive equity share investors‟ reaction, whereas earning decreases bring about a significant negative equity share investors‟ reaction. mgbame and ikhatua (2013) investigated the accounting information and stock volatility in the nigerian capital market. the broad objective of the study is to ascertain whether accounting information contributes to stock volatility in the nigerian capital market. specifically, the study examines if book value per share, dividend per share and earnings per share have a sign effect on stock volatility in nigeria. the results of the study show that the release of information on book values, earnings per share and dividend per share is found to be related to stock volatility. glezakos et al (2012) examined the impact of earnings and book value in the formulation of stock prices and stock investors decisions. using a sample of 38 companies listed in the athens stock market during the 1996-2008 period, the results of the study suggests that the joint explanatory power of the above parameters in the formation of stock prices increases over time. however, they argued that the impact of earnings is diminishing, compared to the book value, while investors strive towards analyzing the fundamental parameters of businesses. olugbenga and atanda (2014) explored the functional relationship between earnings, book values, dividends, cash flow and equity share investment decisions in nigeria. they found that accounting information, earnings, book values, dividends, cash flow from operations, has a direct/positive relationship with equity share investment decisions in nigeria. they argued that earnings, book values, dividends, cash flow from operations, are statistically significant in explaining variations in equity share investors’ behaviours at 5% level of significance. furthermore, they analyzed empirically the relationship between book values and equity share investment decision and from the results concluded that accounting information on book values has a positive relationship with equity share investment decisions in nigeria. babalola (2012) investigated the relevance of accounting information in corporate nigeria .the study employed simple descriptive statistics coupled with the logarithmic regression models to examine this interaction between the period 1999 and 2009, and taking 40 companies from various sectors of the nigerian economy as samples. the results of the study shows that earnings is more relevant than book values , that is, the earnings dictates more the corporate values of firms in nigeria than the book value. notwithstanding the importance of net book value per share in equity share investment decision makings, the book value per share may be manipulated by company management with a view to presenting favourable value of the company worth. net book value per share may be manipulated by slowing down depreciation of assets, writing back of depreciation, fraudulent upward revaluation of assets, buying back of owned share and inclusion of outdate equipments in the company’s asset. given these situations, the net book value will give an improvement rate which will be misleading to investors for investment decision makings. perrera and thrikawala (2010) conducted an empirical study of the relevance of accounting information on investor’s decisions based on the colombo stock exchange, sri lanka. the relevance of accounting data was measured by correlation coefficient with market price per share (mps) and selected accounting information such as earning per share (eps), return on equity (roe) and earning yield (ey). the findings claim that return on equity is significantly related with the share price and investor’s decisions. wang et al (2013) carried out a study on the accounting information and investors reaction in shanghai stock exchange, and reported that correlation analysis and regression analysis of accounting information and investors reaction show that the accounting information has some effect on equity investors’ reaction and stock price, but the significance diversified. they claimed that accounting information of rate of return on stockholders’ equity are most significant and that it has direct impact on investors decisions and share price. copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 8 kabajeh et al (2012) examined the relationship between the return on equity( roe) ratio and jordanian insurance public companies share prices and equity share investors reactions during the period (2002-2007). the results of their study showed a positive relationship between the roe ratio and jordanian insurance public companies share prices. the results also revealed that equity share investors’ decisions are positively influenced by the return on equity. uthman and abdul-baki (2014) investigated the effect of ifrs adoption on the value-relevance of accounting information in nigeria. the ifrs was measured with more disclosure of economic events as well as the fair valuation of economic events under ifrs. the opinions of a number of financial analysts with were sourced. the results of the study show that ifrs adoption has enhanced the value relevance of accounting information in nigeria. they recommend that more measures should be put in place to ensure full compliance of ifrs by all affected nigerian entities. adebimpe and ekwere (2015) empirically examined whether the mandatory adoption of ifrs has improved the value relevance of financial information in the financial statements of commercial banks in nigeria. the study considered a sample of twelve listed banks in nigeria. specifically, financial statement figures of 2010 and 2011 (pre-adoption period) and 2012 and 2013 (post-adoption) were utilized. descriptive statistics and least square regression were conducted to analyze the effect of ifrs adoption on the accounting information quality. the findings reveal that adoption of ifrs (accounting regulation) made earnings reported by nigerian commercial banks to become more informative to equity investors in determining the value of banks and that equity value and earnings of banks are relatively value relevant to share prices. the study submits that adopting the international financial reporting standard (ifrs) have been empirically found to improve the quality of accounting information in some countries, thereby increasing its usefulness to stakeholders and recommends that financial reporting council of nigeria and other accounting standards setters should incorporate more measures to enhance the quality of the financial reporting in order to increase the value relevance of financial statements. olawale (2014) examined the impact of international financial reporting standard (ifrs) adoption on banks performance in nigeria. the study is based on the appraisal of ifrs compliance and adoption. both primary and secondary data were used in this study. the result of the analysis showed that adoption of ifrs significantly influenced financial reporting of banks in nigeria and that there is significant relationship between ifrs and banks performance in nigeria. tsalavoutas, andre, and evans, (2012) examined the combined value relevance of book value of equity and net income before and after the mandatory transition to ifrs in greece. contrary to their expectations, they find no significant change in the explanatory power of value relevance regressions between the two periods. the coefficients on book value of equity and net income are positive and significant in both the pre-ifrs and post-ifrs periods. 3. methodology this study used correlation and ex-post facto research design to examine the effect of accounting information on market value of quoted in nigeria. the population of this study consists of all the listed manufacturing firms on the nigerian stock exchange and have complete financial records on their websites or nigerian stock exchange for the period of 2008– 2017. the data was obtained from the annual reports and accounts of manufacturing firms. model specification in order to achieve the objectives of this study and test of the hypotheses, a functional relationship in form of multiple linear regression model consisting of dependent and independent variables will be formulated. the regression models are presented as follows; pooled regression specification itititit dpsderatomv   3210 1 fixed effect model specification 𝑀𝑉 = 𝛼0 + 𝛼1𝐴𝑇𝑂 + 𝛼2𝐷𝐸𝑅 + 𝛼3𝐷𝑃𝑆 +∑ =3𝑖 1𝛼𝑖𝑖𝑑𝑢𝑚𝜀1𝑖𝑡 2 random effect model specification 𝑀𝑉 = 𝛼0 + 𝛼1𝐴𝑇𝑂 + 𝛼2𝐷𝐸𝑅 + 𝛼3𝐷𝑃𝑆 + 𝜇𝑖 + 𝜀1𝑖𝑡 3 where: mv = market value of nigeria quoted manufacturing firms. 0 = regression intercept ato = assets turnover ratio der = debt equity ratio copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 9 dps = dividend per share  = error term a-priori expectation of the result the explanatory variables are expected to have positive and direct effects on the dependent variables. that is a unit increase in any of the variables is expected to increase market value. this can be express mathematically as  1,  2,  3,> 0. technique for data analysis in order to determine the best choice of analysis technique, the study run three types of regression; ordinary least square (ols), fixed effect and random effect regression. all these method have various assumptions and conditions that must be fulfilled in order to achieve efficient estimates. however, the best techniques will be decided by the hausman specification test (either fixed effect or random effect regression) and lagrangian multpiplier test (either random effect or ols). the random effect has the advantage of accounting for the panel effect in the data as opposed to ols, which pools the data and treats it as if it were obtained from a single entity. in order to achieve reliability of the result, robustness tests like multicolinearity test, hausman test, lagrangian multiplier test for random effect and heteroscedasticity test will be conducted(gujirati, 2003). t-test the t-test was used to test the hypothesis that a particular coefficient is significantly different from zero or whether the estimated coefficient value occurred by chance in equation (2). the tests were performed at both 95% and 99% levels of confidence. f-test the f-statistic is important to test the hypothesis that the whole relationship provided by the equation (2) is significantly different from zero, i.e. whether the independent variables’ characteristics scores explain the variation in growth indicators for each of the individual firms. the test will be performed at both 95% and 99% levels of confidence. r2 change the r-squared (r2 ) value ranging from ‘0’ to ‘1’ or the ‘corrected r-squared’ (r2 ) which is adjusted for degrees of freedom indicates the explanatory power (goodness of fit) of the model. 4. analysis and discussion of findings table 1: test of fixed and random effect models redundant fixed effects tests effects test statistic d.f. prob. cross-section f 1.529179 (22,192) 0.0069 cross-section chi-square 35.681335 22 0.0636 correlated random effects hausman test test summary chi-sq. statistic chi-sq. d.f. prob. cross-section random 7.415428 6 0.0047 source: computed from e-view windows 9.0 in testing the validity of the models, the fixed effects on the cross section redundant fixed effectlikelihood ratio, the p value is 0.000 indicating that the effects are significant. select the random effect and perform the correlated random effects hausman test, testing the random effects model against the fixed effects model. the null hypothesis in that case is that both tests are consistent estimators and the random effects model is efficient. under the alternative hypothesis, only the fixed effect is consistent. since the pvalue is 0.000, the null hypothesis is rejected and, therefore, the fixed effects model is to be preferred. table 2:presentation of formulated pooled effect model results variable coefficient std. error t-statistic prob. der 0.031910 0.020106 1.587099 0.1140 ato 0.048064 0.047975 1.001859 0.3175 bvps -0.061550 0.067609 -0.910373 0.3636 c 9.953181 1.835172 5.423568 0.0000 r-squared 0.086439 mean dependent var 14.93914 adjusted r-squared 0.074935 s.d. dependent var 2.146708 s.e. of regression 2.121677 akaike info criterion 4.373452 sum squared resid 963.3238 schwarz criterion 4.481087 copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 10 log likelihood -476.2665 hannan-quinn criter. 4.416913 f-statistic 1.870285 durbin-watson stat 1.662720 prob(f-statistic) 0.087183 source: computed from e-view windows 9.0 the estimated pooled regression model found that the predictor variables in the model can explain 8 percent variation on the market value of the 23 selected manufacturing firms. the fstatistics and probability confirms that the model is statistically not significant and cannot predict the variation on the market value of the selected quoted firms. the durbin watson statistics proved that there is no presence of serial autocorrelation among the variables. beta coefficient of the variables indicates that debt equity ratio and assets turnover rate have positive effect on market value of the quoted manufacturing firms while book value per share have negative effect on market value of the firms. the insignificant effect of the models and the results of the hausman test enable us to analyze the fixed effect model in the tables below. table 3:presentation of formulated fixed effect model results variable coefficient std. error t-statistic prob. der 0.722684 0.021505 1.054861 0.0428 ato 0.032115 0.050056 0.641582 0.5219 bvps -0.030528 0.076752 -0.397752 0.6913 c 12.36263 2.094911 5.901265 0.0000 effects specification cross-section fixed (dummy variables) r-squared 0.789574 mean dependent var 14.93914 adjusted r-squared 0.504834 s.d. dependent var 2.146708 s.e. of regression 2.066219 akaike info criterion 4.411093 sum squared resid 819.6977 schwarz criterion 4.857006 log likelihood -458.4258 hannan-quinn criter. 4.591145 f-statistic 1.624076 durbin-watson stat 1.905250 prob(f-statistic) 0.000169 source: computed from e-view windows 9.0 the estimated pooled regression model found that the predictor variables in the model can explain 78 percent variation on the market value of the 23 selected manufacturing firms. the fstatistics and probability confirms that the model is statistically not significant and cannot predict the variation on the market value of the selected quoted firms. the durbin watson statistics proved that there is no presence of serial autocorrelation among the variables. beta coefficient of the variables indicates that debt equity ratio and assets turnover rate have positive effect on market value of the quoted manufacturing firms while book value per share have negative effect on market value of the firms. the insignificant effect of the models and the results of the hausman test enable us to analyze the fixed effect model in the tables below. table 4:presentation of formulated random effect model results variable coefficient std. error t-statistic prob. der 0.029011 0.020108 1.442768 0.0005 ato 0.044351 0.047723 0.929330 0.3538 bvps -0.055560 0.068658 -0.809227 0.4193 c 10.52168 1.866897 5.635922 0.0000 effects specification s.d. rho cross-section random 0.472147 0.0496 idiosyncratic random 2.066219 0.9504 weighted statistics r-squared 0.441900 mean dependent var 12.18603 adjusted r-squared 0.315038 s.d. dependent var 2.096432 s.e. of regression 2.072931 sum squared resid 919.5673 f-statistic 1.559801 durbin-watson stat 1.726119 copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 11 prob(f-statistic) 0.040262 unweighted statistics r-squared 0.448637 mean dependent var 14.93914 sum squared resid 964.5282 durbin-watson stat 1.658316 source: computed from e-view windows 9.0 the estimated random regression model found that the predictor variables in the model can explain 44 percent variation on the market value of the 23 selected manufacturing firms. the fstatistics and probability confirms that the model is statistically significant and can predict the variation on the market value of the selected quoted firms. the durbin watson statistics proved that there is no presence of serial autocorrelation among the variables. beta coefficient of the variables indicates that, return on equity, earnings per share, dividend per share, debt equity ratio and assets turnover rate have positive effect on market value of the quoted manufacturing firms while book value per share have negative effect on market value of the firms. the result above enables to test cross-sectional comparism of random and fixed effect in the table below: table 5: cross-section effect test comparism variable fixed random var. diff prob. decision der 0.022684 0.029011 0.000058 0.4067 accept h0 ato 0.032115 0.044351 0.000228 0.4179 accept h0 bvps -0.030528 -0.055560 0.001177 0.4656 accept h0 source: computed from e-view windows 9.0 the table above reveals the variance difference among the variables, as shown above that the variables are all statistically not significant which implies that there is a significant difference between fixed and random effect among the variables. table 6: presentation of granger causality test results null hypothesis: obs f-statistic prob. der does not granger cause mv 168 0.21023 0.8106 mv does not granger cause der 2.59882 0.0774 ato does not granger cause mv 170 1.45459 0.2365 mv does not granger cause ato 2.30013 0.1035 bvps does not granger cause mv 170 0.00118 0.9988 mv does not granger cause bvps 0.25433 0.7757 source: computed from e-view windows 9.0 the causality test above shows that there is no causal relationship among the variables, we accept null hypotheses. table 7: presentation of panel cointegration test series: mv der ato dps alternative hypothesis: common ar coefs. (within-dimension) weighted statistic prob. statistic prob. panel v-statistic -2.429724 0.9924 -2.299783 0.9893 panel rho-statistic 4.640154 1.0000 4.548191 1.0000 panel pp-statistic -3.186873 0.0007 -3.047196 0.0012 panel adf-statistic na na na na alternative hypothesis: individual ar coefs. (between-dimension) statistic prob. group rho-statistic 6.156503 1.0000 group pp-statistic -9.556352 0.0000 group adf-statistic na na source: computed from e-view windows 9.0 copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 12 the results of the cointegration test proved that the variables are cointegrated as the probability coefficient of the variables are less than 0.05, we accept the alternate hypotheses that there is the presence of long run relationship between the dependent and the independent variables. the presence of long run relationship enables us to test for unit root; the table below has the details. table 8:tests of stationarity series: mv method statistic prob.** sections obs null: unit root (assumes common unit root process) levin, lin & chu t* -9.25205 0.0000 23 170 im, pesaran and shin w-stat -3.15566 0.0008 23 170 adf fisher chi-square 86.3823 0.0003 23 170 pp fisher chi-square 145.244 0.0000 23 197 series: d(der) levin, lin & chu t* -22.8587 0.0000 23 159 im, pesaran and shin w-stat -8.51342 0.0000 23 159 adf fisher chi-square 150.519 0.0000 23 159 pp fisher chi-square 343.638 0.0000 23 182 series: bvps levin, lin & chu t* -6.67509 0.0000 23 184 im, pesaran and shin w-stat -3.05967 0.0011 23 184 adf fisher chi-square 83.0036 0.0007 23 184 pp fisher chi-square 156.215 0.0000 23 207 series: ato levin, lin & chu t* -5.96046 0.0000 23 184 im, pesaran and shin w-stat -3.37459 0.0004 23 184 adf fisher chi-square 88.9042 0.0002 23 184 pp fisher chi-square 190.177 0.0000 23 207 source: computed from e-view windows 9.0 the table above presents the summary results of the adf and pp panel unit root tests. the results show that the null hypotheses of a unit root test for first difference series for all the variables can be rejected at all the critical values indicating that the level series which is largely time-dependent and non-stationary can be made stationary at the first difference and maximum lag of one. thus, the reduced form model follows an integrating order of 1(1) process and is therefore a stationary process. it also reveals that the test of stationarity in the residuals from the level series regression is significant at all lags. furthermore, this indicates that the regression is no more spurious but real. that is to say, all the variables are individually stationary and stable. at this level, all the t-statistic became significant at 5 percent. table9:phillips-peron results (non-parametric) cross id ar(1) variance hac bandwidth obs aluminium extrusion -0.161 0.646540 0.619755 2.00 9 austin laz and company -0.843 0.083477 0.064919 1.00 9 paints and coatings 0.013 2.090620 1.597237 3.00 9 berger paints dropped from test beta glass dropped from test cadbury nigeria -0.475 0.300930 0.049049 8.00 9 cement co. of north dropped from test champion brew. plc -0.229 0.968705 0.574934 6.00 9 premier paints plc dropped from test dangote cement plc -0.447 0.455981 0.210542 4.00 9 dangote flour mills plc 0.260 0.517686 0.507708 1.00 9 dn tyre & rubber plc -0.249 1.806874 1.806874 0.00 9 evans medical plc dropped from test flour mills nig. plc dropped from test copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 13 p z cussons nigeria plc -0.618 0.295691 0.223230 2.00 9 vitafoam nig plc -0.101 0.232916 0.216321 4.00 9 glaxo smithkline consumer nig. plc -0.442 0.099122 0.048300 8.00 9 honeywell flour mill plc -0.738 0.480678 0.169825 5.00 9 lafarge africa plc dropped from test nestle nigeria plc dropped from test may & baker nigeria plc 0.054 1.171200 0.428968 8.00 9 flour mills plc. -0.432 0.064481 0.064481 0.00 9 nascon allied industries -0.396 0.259262 0.251736 1.00 9 source: computed from e-view windows 9.0 the result of the power for all the test procedure when the underlying time series model is stationary ar, all the procedures produced a reasonably high power over all the sample sizes and order considered except at order 2 where adf (augmented dickey fuller) and kpss produced extremely low power compared to pp. under this condition, philip-peron (pp) has the highest power over all the sample sizes and ar orders considered. the table presents similar analysis on stationary ma, the power of the tests are extremely high over all the sample sizes and orders considered. similar conclusion as in ar was also observed here. table 3 presents the power of the mixed model (stationary arma), all the test procedures produced high power over all the sample sizes at order 1 but adf and kpss produced low power over all the sample size at order 2 & 3. 4.1 discussion of findings findings revealed that there is positive but not significant relationship between assets turnover rate and the market value of the quoted manufacturing firms over the periods covered in this study. this implies that variation in assets turnover rate of the firms does significantly relate to market value of the firms. the coefficient of the variables proved that a unit increase on the variables will lead to 0.3 percent increase on the market value. this finding confirms the a-priori expectation of the study and validates the fundamentalists’ theory on the effect of information on the stocks prices of quoted firms. the findings of this study contradict the findings of king and langli (1998) that both the book value and the earnings per share have significant relation with the stock price and hence equity investment decision, the findings of omoye, and eriki, (2014) balance sheet information has significant positive influence on the probability of companies that adopt high earnings management but contradict the findings of muhammed (2014) that board composition, institutional shareholding, managerial shareholding and audit committee significant negative relationship with earnings quality. findings revealed that there is positive and significant relationship between assets turnover rate and the market value of the quoted manufacturing firms over the periods covered in this study. this implies that variation in debt equity rates of the firms does significantly relate to market value of the firms. the coefficient of the variables proved that a unit increase on the variables will lead to 7 percent increase on the market value. this finding confirms the a-priori expectation of the study and validates the fundamentalists’ theory on the effect of information on the stocks prices of quoted firms. the findings of this study contradict the findings of king and langli (1998) that both the book value and the earnings per share have significant relation with the stock price and hence equity investment decision, the findings of omoye, and eriki, (2014) balance sheet information has significant positive influence on the probability of companies that adopt high earnings management but contradict the findings of muhammed (2014) that board composition, institutional shareholding, managerial shareholding and audit committee significant negative relationship with earnings quality. findings revealed that there is positive and significant relationship between dividend per share and the market value of the quoted manufacturing firms over the periods covered in this study. this implies that variation in dividend per share of the firms significantly relate to market value of the firms. the coefficient of the variables proved that a unit increase on the variables will lead to 9 percent increase on the market value. this finding confirms the a-priori expectation of the study and validates the fundamentalists’ theory on the effect of information on the stocks prices of quoted firms. the findings of this study contradict the findings of king and langli (1998) that both the book value and the earnings per share have significant relation with the stock price and hence equity investment decision, the findings of omoye, and eriki, (2014) balance sheet information has significant positive influence on the probability of companies that adopt high earnings management but contradict the findings of muhammed (2014) that board composition, institutional shareholding, managerial shareholding and audit committee significant negative relationship with earnings quality. 5. conclusions the results of study through secondary data analysis revealed that accounting information and market value are correlated and there is a strong and significant relationship between accounting information disclosed in firms’ financial statements and market copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 14 value. accounting information significantly influenced market value decisions in the listed companies in nigeria. this finding was substantiated by the r2 of 78 percent variation explained by the accounting information variables modeled in the study. the results of the investigation revealed that there is a strong relationship between accounting information and market value of the quoted firms all accounting information variables considered in this study significantly influenced market value of the quoted firms. further, results of study indicated that debt equity ratio, assets turnover significantly affect market value of the quoted f irms. however, dividend per share has no significant effect. from the above, this study conclude that accounting information have significant effect on the market value of quoted firms in nigeria. 6. recommendations base on the findings of the study, the following recommendations are formulated:  management of the firms should formulate dividend policy that will enhance the market value of the firms an optimal capital structure should be formulated and corporate strategies toward internal and external factors that affect earnings per share negatively of the manufacturing firms should be discouraged in 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(1986). positive accounting theory. englewood cliffs, n.j.: prenticehall copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). https://ideas.repec.org/p/nbr/nberwo/11070.html https://ideas.repec.org/s/nbr/nberwo.html copyright © cc-by-nc 2019, cribfb | afbr asian finance & banking review; vol. 3, no. 1; 2019 issn 2576-1161 e-issn 2576-1188 research article published by centre for research on islamic banking & finance and business, usa 44 controlling parallel exchange market by monetary targeting and anti-inflationary policies bijan bidabad 1 abstract in this paper, the triangular relationship between money, price, and foreign exchange are studied. it is concluded that regulating the exchange rate by volume of liquidity in a period of less than a year is not possible, but in annual and biannual analyses, we can regulate the exchange rate through controlling the liquidity. in other words, in the long run, the exchange rate is affected by liquidity and price level, but in the short run, the price level has only temporary effects on the exchange rate. the results of the study show that:  liquidity affects the exchange rate in the long run  prices affect the liquidity in the long run  in the long run, liquidity and exchange rate affect prices our results show that injection of foreign exchange into the parallel exchange market with different lags has little effects with different directions on the exchange rate. the same result is true for the relationship between liquidity and dollar rate. in other words, in spite of the long run relationship between exchange rate and liquidity, we cannot justify this relationship in the short run. the same is true with the balance of payments position and exchange rate in the short run. by simulating the relationship between injecting (selling) foreign exchange in the parallel exchange market, liquidity and the cumulative balance of payments all with exchange rate, we can conclude that in the short run, regulating exchange rate by instruments such as selling exchange in the parallel market or controlling the liquidity is not possible, but in the long run, conducting foreign exchange sale policy and controlling the liquidity and the balance of payments position can control the exchange market. keywords: foreign exchange, money supply targeting, monetary policy, market control, exchange rate policy 1. introduction mixed monetary-exchange policy making is one of the important problems in macro-economic planning. if monetary and exchange policies are selected independently, one policy may neutralize the effects of the other, and other goals such as price stabilization may not be fulfilled. therefore, selection of the mixed policies in this regard is one of the fundamental subjects in obtaining economic stabilization goals. for this reason, the present study will consider mixed policies of controlling liquidity and exchange rate for obtaining inflation control. therefore, two major policies of monetary and exchange rate targeting are regarded as a base, and price stabilization policy is introduced from the mutual relationship of the two mixed policies. since usually for applying a policy, we have to use only one instrument, controlling the general level of prices by one policy variable faces difficulty from a mathematical point of view because this means to solve an equation with two unknowns. the solution for unknown variables is achieved through a combination of possible solutions. keeping this in mind, and regarding that our policy variable in this discussion is liquidity which has a direct effect on both our targeted exchange rate and targeted inflation rate variables, therefore, obtaining one target, automatically achieves the other target; but the only remaining problem is the effect on the second target is not as much as we wished a priori. in other words, it means that if liquidity decreases a percent, the decrease in the exchange rate and the inflation rate will be b percent and c percent respectively. therefore, in order to reach target b, we can use the variable a, but the figure for c will be obligatory (automatically) defined. but since the targets 1 (b.a., m.sc., ph.d., post-doc.) research professor of economics, monetary and banking research academy, .http://www.bidabad.com bijan@bidabad.combidabad@yahoo.com http://www.bidabad.com/ mailto:bijan@bidabad.com copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 45 have the same direction, reaching b is accompanied by somehow of reaching target c, which is not as much as the policymaker intended. in order to obtain predefined amounts for b and c, the policy variables should be increased to two. this means that we have to change simultaneously the two variables of liquidity and foreign exchange supply in order to control the two variables of the value of the national currency (exchange rate) and inflation rate. in this case, the number of instrumental variables is equal to the number of target variables, and the problem has a solution from a mathematical point of view. therefore, we select two main lines for our study, which are practically based upon our two target variables. these two axes are as follows:  inflation targeting policies  exchange rate targeting policies several surveys have been carried out about inflation targeting, and this policy is regarded as a recognized method for controlling inflation. the basis of this policy is using monetary instruments to control liquidity in order to achieve an optimum rate of inflation. the abstract of these concepts is presented by a joint paper of m. mojarrad and b. bidabad in 1997. there are many documented guidelines about targeting the exchange rate, which is described in the collection of trade and exchange rate policies of governments and central banks around the world for controlling the supply of foreign exchange. they are all somehow connected to the supply of foreign exchange, but in this paper, we will only consider the direct interference of the central bank as an instrument of foreign exchange supply control. 2. inflation targeting and monetary policy in iran (ir) there are many discussions between economists about inflation with the meaning of a rapid and sustained increase in prices from its reasons and sources, its economic importance, its control and its effects on other economic variables points of view, which are not mentioned in this paper. there are also many studies in iran about inflation, its causes, and effects. most of these studies confirm that inflation in iran is a monetary phenomenon, and other factors such as those concerning supply side, or cost-push inflation have fewer effects on the increase of general price level. more explicitly, we can say that although inflation sources of supply-side have had short-run effects on prices, in the long run, inflation in iran has been demand pull2. on the basis of many studies, we can conclude that about 99% of long-run price changes were caused by the increase in liquidity. in other words, they confirm the monetary nature of inflation in the country and consider the control of liquidity as the only way for controlling inflation. regarding different studies conducted in iran, we realize that monetary transmission mechanism which is the affecting method of monetary policy and liquidity on the real sector of the economy which almost has had no effects, because it couldn't create any motivation through decreasing the rate of interest of banking loans. in other words, liquidity can only affect the demand through price increases. this notion opens the way for iran's policymakers in targeting inflation via controlling the liquidity without worrying about the depression of the supply side. in other words, now we can claim that the decrease in liquidity will not cause production decrease. it is clear that all these concepts are considered in the domain of long term analyses. before recent five years plans, we practically didn’t have any targeting policy as in comparison with other countries for controlling the inflation but during first and second development plans of 1989-93 and 1995-1999; we observe some targeting for controlling the inflation. these targeting in the text of the plan's aims are specified as a defined rate of inflation as a target. we have some similarities with other countries in targeting. in general, the practices of other countries show that the targeting plan for controlling inflation is in the medium term framework. regarding the goals of the first and second development plan, we see similar policies for medium-term goals. the second plan, which was arranged on the bases of the stability of internal and external sectors from the stability of prices and balance of payments points of view, had a target rate of 12.4% for the annual inflation rate. of course, regarding the special position of our country from a dependency point of view on oil income and oil shocks and various international problems, it seems that if 2 komijani and bidabad, 1990, 1991 and 1992. http://www.bidabad.com/ http://www.bidabad.com/ copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 46 this goal was set in a range which could cover the effects of foreign fluctuations, it would increase the credibility of targeting for controlling the inflation. in this regard, we can mention the deep affectability of monetary policy from fiscal policy and considering the experience of other countries for controlling inflation; this concept will be very important. in the third development plan, the views of the planners on economic problems were changed in general, and therefore, they didn’t use classic methods for planning in determining quantitative goals. that is why we can’t perceive their views on inflation targeting. the third plan was in general concerned about structural reforms and did not discuss the details of quantitative goals. considering all above concepts, there is also another important principle in other countries which is considered as the reason for their success, and it is credibility, acceptability and the belief of private sector about targeting policies for controlling inflation for which unfortunately no important step has been taken about this concept in iran. the other problem is the responsiveness of the monetary authorities to defined goals. it seems that the central bank should not surpass its legal authorities. surpassing credit ceilings reduces the responsiveness of the central bank to the concerned authorities. keeping these ceilings in other countries is strictly regarded by policymakers of other countries. if the central bank pursuit only ad hoc and day-to-day policies, it cannot achieve the predefined goals. it is also clear that in order to a complete success in conducting monetary policies, necessary conditions should be available so that all monetary tools could be used. the study of previous conditions and backgrounds shows that the central bank could not use some of her legal monetary instruments effectively. these include open market operations, discount window, reserve requirement ratio, and the interest rates of bank loans and credits. all these instruments could not be used thoroughly or partially because of their own reasons. 3. exchange rate targeting policy as it was mentioned, all policies that are to somehow related to exchange rate control can be related to exchange rate targeting, and most of the economic policies are to somehow related to foreign exchange. but at this moment, we are focused on the supply of foreign exchange for controlling the exchange rate. the generality of this discussion is prevailing in exchange rate management policies, but here we only study the open market policy conducted on foreign exchange by monetary authorities in the parallel market. this policy is called “sale of foreign exchange in the parallel (free) market” and was adopted for the period of 1989 to 2001. in general, it is clear that whenever governments try to control prices through non-economic measures which are in confliction with supply and demand mechanism, automatically a parallel market is developed. the emergence of the parallel exchange market in the previous two decades is not exempted from this general rule. governments consider parallel markets as an obstacle for implementing their policies, but we should accept that parallel markets are the results of the government policies. in other words, whenever we do not follow the inherent rules of economics, we should be waiting for the emergence parallel market in the same field of policymaking. before the revolution, the foreign exchange parallel market was negligible. very few amounts of foreign exchange were transacted in exchange offices at a price which followed the exchange rate of the banking system, so these exchange offices pegged their rates between of bid and offer rates of the banking rates. in other words, their bid rate was a little more than the bid rate of the banking system, and their offer rate was a little lower than the banking offer rates. this method of pricing helped them to survive; in other words, their profit margin was between the profit margins of the banks. after the revolution, banks developed regulations on exchange sale, which was considered as a restriction for the supply of foreign exchange. the restricted supply practically pushed up the rates, but the government kept banking rates unchanged, which caused to develop a parallel market with higher rates. because of the unordinary conditions of post-revolution, the gap between the parallel market and banking rates widened. the government tried several times to control this market with new regulations. the extent of these regulations went so far to consider the dealers of the parallel market as trouble-makers, or economic terrorists and heavy penalties were developed for them, and police and security forces were used against this market, but the government had little success in eliminating this market. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 47 one of the policies applied against this market was government interference in the market by direct sale of foreign exchange in order to increase the supply and decrease the parallel rates. this policy was conducted in several ways so that the banking system also sold foreign exchange with special rates and conditions. sometimes the central bank gave official permissions to private foreign exchange offices and sold foreign exchange through these offices. in some exceptional cases, the brokers of the central bank sold foreign exchange on the nearby main streets. these decisions were made on the bases of the analysis of the decision makers of those days, but the main principle behind these decisions was injecting foreign exchange into the market in order to decrease the parallel rates and achieve income in rial terms. the main precondition for applying this policy is the acceptance of an unofficial foreign exchange market. in some years, the policymakers were so radical that they considered the dealers of the parallel market as smugglers and punished them very severely, which suggests that this policy was not developed very well. we should accept that during the scarcity of foreign exchange supply with fixed rate regime, this is a natural phenomenon, and the market mechanism creates it automatically. the best method of dealing with this market is accepting it for the first time. this means that we should legally accept the transactions through this market and even consider it as an economic activity and prevent any noise from it and in the next phase automatically try to marginalize it by applying policies and adopting reforms in foreign exchange management. if the foreign exchange system tends to unify, the management of the system becomes transparent. in other words, all transactions of goods and services should be done in single rates, and the rate of the parallel market will, at last, be within the margins of official rate fluctuations. since the prices of many items of goods and services are affected by the foreign exchange rate in the parallel market and its fluctuations will cause the fluctuation of the prices of goods and services, the stabilization of the foreign exchange rate in the parallel market will cause partial stabilization in goods and services market. the injections of foreign exchange into the parallel market for stabilization will spill over into other markets. after the revolution in iran, the volume of money in circulation has had an increasing trend. economic theories demonstrate that this increase will lead to depreciation of money, in other words, when the volume of rial is increased, we should expect that the value of rial is to be reduced against foreign currencies, or its parity rate decreases. we have practically seen this event in the past few decades. the increase of the volume of rial from 2613 billion in 1996 to 320957 billion rials at the end of 2001 can be the main cause of the increase of parity rate of american dollar from 70 rials to 8000 rials. econometric researches also confirm this finding. the policy of selling foreign exchange in the parallel market not only increases the supply of foreign exchange but also decreases the amount rial in the market, both of which will strengthen the national currency. most of the increases of the amount of liquidity after the revolution have been the result of the expansion of monetary base through the increases of government sector debts to the banking system. the details of this phenomenon have been described in several pieces of research, but here we consider that the mentioned results are sufficient to be used and not to be retested. the increase of the government sector’s debt to the banking system has been created through financing budget deficit by borrowing from the banking system, which is similar to seignorage of extra money by expanding the monetary base. the policy of selling foreign exchange in the parallel market can be regarded as a method for partially financing the budget deficit. in this way, the government can finance the budget deficit by selling foreign exchange in the parallel market at unofficial prices without obligation of borrowing from the banking system. in other words, without increasing the liquidity (in spite of borrowing from the banking system), this policy can finance the budget deficit. price increase and inflation in iran has a monetary source. many studies confirm this hypothesis. the increase in money supply causes an increase in general price level instead of increasing the supply of goods and services in the economy. regarding this concept, it could be said that the policy of selling foreign exchange in the parallel market will decrease the price level through the decreasing foreign exchange rate which causes to decrease the price of imported commodities which use foreign exchange from the parallel market sources, and also through decrease of liquidity which has a deflationary effect. after the approval of the usury-free banking law, since bond has usuric nature, it cannot be applied as a policy tool for changing the amount of money in circulation. in the western economies, central banks conduct open market copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 48 operations by buying and selling bonds, and decrease or increase the amount of money in circulation and thereby, affect the interest rates and investment thereafter. but as it was mentioned earlier, since it is not possible to use bonds, it is not possible to conduct open market operations. the government interference in the parallel exchange market affects liquidity, and if the government buys, as well as selling foreign exchange in this market, these activities will be more similar with open market operations, and therefore, it is possible to affect interest rate in the parallel market by applying this policy. of course, this kind of operation is not completely in accordance with open market operation, but when other monetary instruments are not efficient enough, or applicable, this policy is of great help to monetary authorities. after this explanation, we return to the policy of selling foreign exchange in the parallel market. this policy confirms the followings:  the parallel market is implicitly accepted  it is a step towards exchange rate unification  it helps to stabilize the rates of foreign exchange  it decreases the amount of available rial, and thereof strengthens the national currency  it can partially finance the budget deficit  this policy has deflationary effects  it can be regarded as a monetary tool for open market operations year sale of foreign exchange in the parallel market (billion rials) 1982 0.00 1983 5.70 1984 34.50 1985 88.70 1986 17.90 1987 87.00 1988 141.50 1989 744.30 1990 2256.80 1991 2510.70 1992 4078.00 1993 4775.00 1994 0.00 1995 2765.00 1996 5407.00 1997 10428.70 1998 6021.90 1999 18532.20 2000 39323.50 2001 52445.10 the table above shows the amount of foreign exchange sold in the parallel market from 1982 to 2001. since the central bank has sold foreign exchange at different rates during this period, we have only the amounts in rial term (not in dollars). copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 49 in the macro-econometric model of iran3, the effect of selling foreign exchange in the parallel market has been studied. the calculations show that by selling foreign exchange equal to one thousand billion rials, the exchange rate of the parallel market decline will be 65 rials. 4. the relationship between the exchange rate in the parallel market and liquidity perhaps the most important and famous view about the method of defining the parity of exchange rate is to consider it as a price which is defined by the intersection of supply and demand of foreign exchange in the market. this view is regarded as the view of the balance of payments for determining the exchange rate because the supply and demand of foreign exchange is created through the transactions registered in the balance of payments. balance of payments has two main different parts of current account and capital account. the current account includes the difference between imports and exports of goods and services and the net value of other received and payments such as compensations, gifts and etc. in connection with foreigners. if in this account imports exceed exports, it is said that the account is facing a deficit and vice versa. it is clear that this account is not necessarily always in balance. if this account is facing a deficit, it will be compensated by other accounts. this deficit means that the expenses abroad have been more than earnings from abroad. one way of compensating this deficit is by the use of the capital account. in other words, this deficit will be deducted from the existing capital, or some amount of capital equal with the deficit has been transferred out of the country, so that brings the balance of payments to the equilibrium position. if there are no other transactions in the capital account, in order to keep the balance of payments, we have to import foreign capital as much as a deficit in the form of foreign loans, or the decrease of foreign exchange reserves or investment permissions to foreigners, etc. in other words, if a country faces a deficit in the balance of payments, it means that the reserves and assets of the country have been decreased. the monetary view of the balance of payments with emphasize on capital account practically defines the role of the balance of payments in determining the exchange rate. in simpler words, this view says that when the balance of payments is facing a deficit, the foreign assets will decrease equally. the importers go to the foreign exchange market according to their previous demand function, but since the supply of foreign exchange has been decreased as much as the deficit of balance of payments, the exchange rate increases. this increases the price of imported goods and therefore, decreases the demand for import; moreover, since export has become more profitable, exports will increase and leads to a new balance of payments and new exchange rate. here, the important thing is the amount of demand for import and the supply of export which specify this mechanism. both of these functions are the result of domestic and external prices. in other words, whenever external prices do not change, and internal prices increase, the demand for import increases, and the supply for export decreases. these changes in import and export, through changes in the balance of payments and changes in the amount of foreign reserves, will cause changes in the foreign exchange rate. in other words, when domestic prices increase, the purchasing power decreases, but the demand for imported goods increases in comparison with domestic goods, which has now a higher price. practically this situation causes an increase in the foreign exchange rate. an increase in the supply of national money has also a similar effect on the demand for the foreign exchange rate in the same way. the increase in national money supply will increase gross domestic expenditures, and domestic prices and the demand for imported goods will increase, and exports will decrease. because as it was mentioned before, the demand for imports and the supply of exports are functions of domestic and external prices. the increase in demand for imports and the decline in the supply of exports will lead to a balance of payments deficit, which means an increase in demand for foreign currency because of the import increase. the interaction between the national currency and foreign exchange in the market for exchanging national money into the foreign exchange will ultimately lead to the increase of foreign exchange rate. in the second round, this increase will lead to the adjustment of the balance of payments and with higher prices and a higher rate of foreign exchange; a new equilibrium will be achieved in the economy. this phenomenon has been prevailing in the economy of iran after the revolution. the permanent increase in the money supply has practically increased domestic prices and has decreased the purchasing power and caused the devaluation of the national currency. several pieces of research confirm this phenomenon4. 3 bidabad, 1996. http://www.bidabad.com/ 4 komijani and bidabad, 1990, 1991, and 1992. http://www.bidabad.com/ http://www.bidabad.com/ http://www.bidabad.com/ copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 50 there are also several papers showing that the permanent increase in the supply of money has caused the slow to lose the value of the national currency5. in these papers, an econometric model for iran has been evaluated, and this hypothesis has been tested. unfortunately, because of poor data available about the balance of payments, testing this hypothesis faces difficulties. some of the problems of the balance of payments data have been described in annual economic reports of the central bank and papers written by the author in 1994 and 1995. in the research carried out by the author and komijani (1992), the relationship of dollar rate in the parallel market and balance of payments has been shown through econometric models. these researches show the strong descriptive effect of the balance of payments variable on the variations of the foreign exchange rate in the parallel market. but in spite of these confirmations, because of data problems of the balance of payments, the calculation results are very sensitive to every single year data, and by increasing or decreasing a single observation, the results of calculations will change very much. in the continuation of the above-mentioned researches about the testing this hypothesis whether the continuous increase in the parity rate of dollar with rial in the parallel market is because of the increase of liquidity, various calculations have been carried out6. this calculation shows that by an increase of one trillion rial of liquidity, the exchange rate in the parallel market increases 37.5 rials. the results of the regression of this calculation describe 96 percent of the variations. that is to say, that 96 percent of the changes in the foreign exchange rate in the parallel market is due to the increase in liquidity. sometimes, economic analysts doubt that the increase of foreign exchange rate is the cause of the increase in liquidity and prices. in this regard, they believe that external shocks in the foreign exchange revenues are practically the reason for this increase, or the devaluation policy of the government has increased liquidity and prices. in order to check the direction of causality, we conduct the following test. the aim of this test is first to find out whether the increase in the foreign exchange rate has caused an increase in liquidity? secondly, is it true that the increase in the foreign exchange rate has caused prices to increase? in other words, which one is the cause and which one is the effect? to do this, granger-sims causality test has been carried out on monthly data. first, we test the causality of liquidity and the rate of foreign exchange in the parallel market. then we test the causality of liquidity and price level. this shows that price level is not the main reason for the increase of liquidity, while, the increase of liquidity is the main source of the general price increase. in short, from the above discussions, we conclude that the increase of liquidity not only increases the price level in iran but also has caused an increase in the foreign exchange rate. in other words, the increase of liquidity in the country is the cause of decreasing the purchasing power of the national currency, and the decrease of parity rate of rial against foreign exchanges. therefore, the only way for stabilizing exchange rate is the controlling of liquidity. otherwise, other temporary policies such as those conducted in the previous two decades, are not considered proper policies, because although those policies could have positive effects on the market, in the long run, will ruin the infrastructure for investment7. therefore, considering the above discussions, the foreign exchange market should be controlled through mixed exchange and monetary policies. 5. time series analysis in this section, we test the time series for stationarity, to be used in the next sections. the following variables have been tested for unit root. all data are monthly series. several tests such as df8 and adf9 have been used, and by using correlogram, auto-correlation, and partial correlation, the necessary differences were extracted to make the series stationary. tests have been carried out on the followings variables:  foreign exchange rate  consumer price index 5 komijani and bidabad, 1992, and bidabad, 1994. http://www.bidabad.com/ 6 bidabad, 1994. http://www.bidabad.com/ 7 economic security and obstacles facing investment (bidabad, 1995). http://www.bidabad.com/ 8 dickey-fuller. 9 augmented dickey-fuller. http://www.bidabad.com/ http://www.bidabad.com/ http://www.bidabad.com/ copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 51  liquidity (the broad definition of money m2) according to the studies, the following table has been prepared which shows the changes for making the stationery of the variables variable changes made to make the series stationary exchange rate [d(dollar)] first order difference consumer price index [d(cpi)] first order difference liquidity dlogm2112=d(log(m2),1,12) first order difference and 12 months difference on logarithm after doing changes to make the series stationary, we concluded that:  the logarithm of most of the series increases stationarity  some monetary series and prices needed 12 months difference  therefore, the following variables can be regarded as i(1) variables  d(log(dollar), ,12)  d(log(cpi), ,12)  d(log(m2), ,12) 6. causality between the main variables the previous studies and the assumptions of the present study are based on the tight relationship between monetary variables, foreign exchange rate, and prices. in this section, we use causality tests on these variables. in other words, we want to test the direction of the effect on the foreign exchange rate by the monetary variable and general price level. by the previous section, we found out the different orders to make the necessary time series stationary. now we use these results. before evaluating the causality between the variables, in order to find the correct form of granger relationship, we have to check for their co-integration. if the residual of long term regression of the two variables are stationary, or in other words, they have not a unit root, the two variables are co-integrated. if so, their simple difference will not be enough for regression, and therefore, the model should be used as ecm10. although this correction can explain the short variations of the model around the long term trend by inserting an error item which has been obtained from the long run equation, it adds its own problems to the model. for example, if the specification of the model is not strictly supported by economic theory, the results of the error correction model will have conceptual problems. 7. theoretical dynamic causality among variables when we define a regression, we implicitly presuppose that what variable or variables explain another variable which is defined as the dependent variable. it means that we define the causality relationship in which, by changing a variable, the dependent variable will change. this causality relationship can be a one-way relationship or two ways. if x causes y, but y has no effect on x, it is a one-way relationship. but if x affects y, and y affects x, then we have a two-ways or polar relationship. one of the methods for the causality test is the granger test. this test is based on this concept that the future can not affect the past or the present time. the test is a kind of var(k) test: tjt k j jjt x j jt tjt k j jjt k i ijt eyxax eyxay 2 1 2 1 220 1 1 1 1 10               10 error correction model. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 52 upon the above equations, we can evaluate the following different cases: 1. if  11 12 1, , ... , 0k    and 21 22 2{ , ,..., } 0k    , there is a one-way causality relationship from x to y. 2. if  11 12 1, , ... , 0k    and 21 22 2{ , ,..., } 0k    , there is a one-way causality relationship from y to x. 3. if   0,...,, 11211 k and 21 22 2{ , ,..., } 0k    , there is a two ways causality relationship between y and x. in order to test the above hypothesis, we use f statistics. this test will be carried out after testing for stationarity and making variables stationary before further use. 8. the dynamic causality among variables (practical) regarding the mentioned cases in the previous section, by using the granger causality test, we test the variables two by two and with different lags. the first group of tests includes testing causality among three variables in a range of 1 to 24 lags:  the first order difference of dollar rate series with 12 months seasonal adjustment (ddollar)  the first order difference of liquidity with 12 months of seasonal adjustment (dm2112)  the first order difference of consumer price index with 12 months seasonal adjustment (dcpi112) the second group of tests is similar to the first group with one difference that the logarithms of variables are used instead of the original ones. the summary of the results of these tests is presented in the next tables and diagrams. the table of f statistics defines the probability of accepting the null hypothesis. this hypothesis is defined as follows: h0: the variable one is not the cause of the second variable. h1: the variable one is the cause of the second variable. if the calculated f is greater than f in the table, we reject the null hypothesis, and if the calculated f is smaller than f in the table, we accept the null hypothesis. the following table gives f statistics for a large number of observations (more than 120 in this case) and the degree of freedom of the denominator equal to 5 percent and 1 percent level of significance: f statistics for a number of observations over 120 and degree of freedom of numerator (lag) 24 20 15 12 10 9 8 7 6 5 4 3 2 1 lags 1.52 1.57 1.67 1.75 1.83 1.88 1.94 2.01 2.10 2.21 2.37 2.60 3.00 3.84 5% level of significance f 1.79 1.88 2.04 2.18 2.32 2.41 2.51 2.64 2.80 3.02 3.32 3.78 4.61 6.63 1% level of significance f by considering the next tables and the graphs for a simple non-logarithmic model, we conclude:  the change in dollar rate, after at least 1 month, will lead to a change in liquidity.  the change in liquidity will affect dollar rate after 1 month, and its further effects appear after 9 to 11 months and again after 2 years changes the dollar rate.  changes in prices affect liquidity after a lag of 8 months to 2 years.  liquidity changes will affect prices after 1 year. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 53 with 12 to 24 months lag after 9 to 24 months lag with 2 to 24 months lag always  price changes affect the dollar rate after 1 month.  changes in dollar rate affect cpi in every lag. in short, with the analysis of the above conclusions, at 95% of significance level, we can draw the following diagram: with 3 to 5 months lag with 23 to 24 months lag simple f-statistics number of lags ddollar112 does not granger cause dm2112 dm2112 does not granger cause ddollar112 dcpi112 does not granger cause dm2112 dm2112 does not granger cause dcpi112 dcpi112 does not granger cause ddollar112 ddollar112 does not granger cause dcpi112 1 2.754 3.292 0.148 0.250 2.257 6.882 2 3.980 1.220 0.268 0.784 8.270 4.553 3 6.872 1.444 0.071 0.459 5.796 2.950 4 5.729 0.857 0.868 0.356 4.901 3.784 5 4.883 1.116 1.408 1.157 6.056 3.440 6 4.091 1.626 1.285 1.291 5.095 3.334 7 4.776 1.379 1.302 1.267 5.383 4.325 8 4.221 1.150 1.347 0.961 5.225 3.775 9 4.345 1.780 3.038 0.930 4.265 4.127 10 4.244 1.747 2.715 0.818 3.790 3.657 11 3.918 1.649 2.496 1.175 3.367 4.448 12 3.700 0.742 2.176 1.859 2.456 2.577 13 3.403 0.694 2.137 1.863 2.335 2.509 14 3.157 0.671 2.036 2.014 2.473 2.339 15 2.780 0.637 2.075 1.739 2.198 2.622 16 2.541 0.696 2.173 1.959 2.232 2.250 17 2.505 0.715 2.197 1.849 2.107 2.102 liquidity dollar rate prices copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 54 18 2.345 0.801 2.433 1.815 2.227 2.057 19 2.294 0.943 2.546 1.699 2.095 1.992 20 2.320 1.097 2.382 1.558 1.998 1.852 21 2.419 1.050 1.997 1.629 2.063 1.866 22 2.753 1.142 1.801 1.628 2.185 1.907 23 2.500 1.620 1.732 1.640 2.190 1.862 24 2.363 1.633 1.634 1.697 1.591 1.597 simple probability number of lags ddollar11 2 does not granger cause dm2112 dm2112 does not granger cause ddollar112 dcpi112 does not granger cause dm2112 dm2112 does not granger cause dcpi112 dcpi112 does not granger cause ddollar112 ddollar11 2 does not granger cause dcpi112 1 0.098 0.071 0.700 0.617 0.134 0.009 2 0.020 0.297 0.764 0.457 0.000 0.011 3 0.000 0.231 0.975 0.710 0.000 0.034 4 0.000 0.490 0.483 0.839 0.000 0.005 5 0.000 0.353 0.223 0.332 0.000 0.005 6 0.000 0.143 0.266 0.263 0.000 0.004 7 0.000 0.217 0.251 0.268 0.000 0.000 8 0.000 0.333 0.222 0.467 0.000 0.000 9 0.000 0.076 0.002 0.499 0.000 0.000 10 0.000 0.075 0.004 0.611 0.000 0.000 11 0.000 0.091 0.006 0.307 0.000 0.000 12 0.000 0.707 0.014 0.042 0.006 0.004 13 0.000 0.766 0.014 0.037 0.007 0.004 14 0.000 0.799 0.017 0.019 0.003 0.006 15 0.000 0.839 0.013 0.048 0.009 0.001 16 0.001 0.793 0.007 0.018 0.006 0.006 simple 0.000 1.000 2.000 3.000 4.000 5.000 6.000 7.000 8.000 9.000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 lags f st at is tic ddollar112 does not granger cause dm2112 dm2112 does not granger cause ddollar112 dcpi112 does not granger cause dm2112 dm2112 does not granger cause dcpi112 dcpi112 does not granger cause ddollar112 ddollar112 does not granger cause dcpi112 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 55 17 0.001 0.782 0.006 0.026 0.010 0.010 18 0.003 0.695 0.001 0.027 0.005 0.011 19 0.003 0.531 0.000 0.041 0.008 0.013 20 0.002 0.361 0.001 0.070 0.011 0.022 21 0.001 0.411 0.009 0.049 0.008 0.019 22 0.000 0.314 0.021 0.047 0.004 0.015 23 0.000 0.051 0.027 0.042 0.003 0.017 24 0.001 0.047 0.041 0.030 0.056 0.055 the same study regarding the logarithms of the variables gives the following conclusions:  change of dollar rate affects liquidity after 3 to 5 months.  change of liquidity does not affect the dollar rate.  price changes after 3 months affect liquidity.  liquidity change does not affect prices.  price changes after 6 to 11 months and also after 13 to 15 months causes changes in the dollar rate.  changes in dollar rate causes changes in prices after 11 months. in short, the above conclusions can be shown at a 95% level of significance in the diagram below: with 3 to 5 months lag simple 0.000 0.200 0.400 0.600 0.800 1.000 1.200 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 lags pr ob ab ili ty ddollar112 does not granger cause dm2112 dm2112 does not granger cause ddollar112 dcpi112 does not granger cause dm2112 dm2112 does not granger cause dcpi112 dcpi112 does not granger cause ddollar112 ddollar112 does not granger cause dcpi112 liquidity dollar rate prices copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 56 log f-statistics no. of lags dlogdollar112 does not granger cause dlogm2112 dlogm2112 does not granger cause dlogdollar112 dlogcpi112 does not granger cause dlogm2112 dlogm2112 does not granger cause dlogcpi112 dlogcpi112 does not granger cause dlogdollar112 dlogdollar112 does not granger cause dlogcpi112 1 0.640 0.025 3.308 0.374 0.441 0.274 2 1.910 1.789 1.586 0.226 0.273 1.323 3 4.043 1.127 2.737 0.405 1.006 1.093 4 3.175 0.814 2.097 0.341 0.686 0.879 5 2.397 1.061 1.734 0.923 1.811 1.007 6 1.966 0.972 1.408 0.763 2.467 1.271 7 1.809 0.959 1.351 0.643 2.368 1.007 8 1.614 0.945 1.166 0.527 2.274 0.920 9 1.752 0.921 1.552 0.570 2.102 0.836 10 1.544 1.029 1.393 0.629 2.449 0.881 11 1.425 1.661 1.263 0.917 2.120 2.077 12 0.875 0.874 0.826 0.413 1.455 1.519 13 0.742 0.796 0.851 0.385 1.920 2.059 14 0.660 0.722 0.697 0.483 1.823 1.819 15 0.644 0.731 0.721 0.475 2.180 2.779 16 0.593 0.823 0.780 0.540 1.555 2.759 17 0.698 0.773 0.855 0.480 1.475 2.558 18 0.720 0.769 0.910 0.560 1.580 2.193 19 0.693 0.854 0.854 0.559 1.521 2.185 20 0.687 0.816 0.834 0.559 1.383 2.114 21 0.712 0.777 0.805 0.584 1.323 2.126 22 0.701 0.761 0.814 0.602 1.323 2.379 23 0.595 0.752 0.914 0.541 1.509 2.569 24 0.599 0.840 0.796 0.561 0.965 2.398 logarithm 0.000 0.500 1.000 1.500 2.000 2.500 3.000 3.500 4.000 4.500 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 lags f s tat ist ics dlogdollar112 does not granger cause dlogm2112 dlogm2112 does not granger cause dlogdollar112 dlogcpi112 does not granger cause dlogm2112 dlogm2112 does not granger cause dlogcpi112 dlogcpi112 does not granger cause dlogdollar112 dlogdollar112 does not granger cause dlogcpi112 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 57 logarithm 0.000 0.200 0.400 0.600 0.800 1.000 1.200 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 lags pr ob ab ili ty dlogdollar112 does not granger cause dlogm2112 dlogm2112 does not granger cause dlogdollar112 dlogcpi112 does not granger cause dlogm2112 dlogm2112 does not granger cause dlogcpi112 dlogcpi112 does not granger cause dlogdollar112 dlogdollar112 does not granger cause dlogcpi112 log probability no. of lags dlogdollar112 does not granger cause dlogm2112 dlogm2112 does not granger cause dlogdollar112 dlogcpi112 does not granger cause dlogm2112 dlogm2112 does not granger cause dlogcpi112 dlogcpi112 does not granger cause dlogdollar112 dlogdollar112 does not granger cause dlogcpi112 1 0.424 0.872 0.070 0.541 0.507 0.600 2 0.151 0.170 0.207 0.797 0.761 0.268 3 0.008 0.339 0.044 0.749 0.391 0.353 4 0.015 0.517 0.082 0.849 0.602 0.477 5 0.039 0.383 0.128 0.467 0.113 0.415 6 0.073 0.445 0.213 0.599 0.026 0.273 7 0.088 0.462 0.228 0.719 0.025 0.427 8 0.124 0.480 0.321 0.834 0.025 0.501 9 0.081 0.507 0.133 0.819 0.032 0.583 10 0.129 0.421 0.186 0.787 0.009 0.552 11 0.167 0.087 0.249 0.525 0.022 0.025 12 0.573 0.573 0.623 0.956 0.147 0.123 13 0.718 0.663 0.604 0.973 0.032 0.020 14 0.808 0.748 0.774 0.939 0.040 0.041 15 0.833 0.748 0.759 0.950 0.009 0.000 16 0.884 0.656 0.705 0.921 0.090 0.000 17 0.799 0.720 0.627 0.958 0.113 0.001 18 0.784 0.732 0.566 0.922 0.075 0.006 19 0.819 0.638 0.638 0.929 0.089 0.005 20 0.831 0.689 0.669 0.934 0.143 0.007 21 0.812 0.740 0.709 0.923 0.174 0.006 22 0.829 0.764 0.703 0.917 0.172 0.001 23 0.923 0.781 0.579 0.956 0.082 0.000 24 0.925 0.678 0.736 0.949 0.516 0.001 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 58 adding up the above results, we can draw the following diagram for short term analysis: the following diagram is for more than a year analysis: the above diagrams show that foreign exchange rate cannot be regulated by changing liquidity in less than a month, and the results show that only the general price level can affect this variable. but in one to two years of analysis, the foreign exchange rate can be regulated by liquidity control. in other words, the long run trend of the foreign exchange rate is affected by liquidity and price level changes, but since price changes have also short term effects on the foreign exchange rate, therefore, we can change this hypothesis in error correction model as follows: foreign exchange rate = long term function (price level, liquidity) + error if in the first order stationary condition of the three variables of the foreign exchange rate, liquidity, and price level, the co-integrated regression creates stationary error, we follow the error correction model. after the study of the foreign exchange rate, liquidity, and price index variables and making them stationary, we follow the model with stationary variables. with the estimation of long-run function, we realized that the existing co-linearity between liquidity and cpi, practically the obtained weights are not as they were expected and therefore, it is not possible to follow error correction model. on the basis of obtained graphs and results for long run effects, we consider the three following relationships: eq1: dollar=c(1)*m2+ c(2)*dummy8000 + c(3)*dummy8000*m2 + c(4) + reseq1 eq2: m2= c(11)*cpi+c(12) +c(13)*dummy8000+c(14)*dummy8000*cpi+ reseq2 eq3: cpi= (c(21)+c(22)*dummy8000)*dollar+(c(23)+c(24)*dummy8000)*m2 +c(25)+ c(26) *dummy8000 + reseq3 these equations show the mathematical causality relationship between our variables. regarding the existence of high co-linearity between liquidity and price level, the price variable has been omitted from the first equation. in order to consider the policies for fixing dollar rate at 8000 rials, the dummy variable “dummy8000” has been introduced into the model which affects the intercept, as well as the slope. the amount of this dummy from the 11 th copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 59 month of 1998 and afterward is one, and for other times is zero. the long term regression results regarding the structural changes in foreign exchange rates and graphs are presented on the next pages. dependent variable: dollar method: least squares sample(adjusted): 1365:01 1380:12 included observations: 192 after adjusting endpoints dollar=c(1)*m2+c(2)*dummy8000+c(3)*dummy8000*m2+c(4) coefficient std. error t-statistic prob. c(1) 0.039448 0.000673 58.65213 0.0000 c(2) 8738.370 269.5357 32.42008 0.0000 c(3) -0.043906 0.001354 -32.42936 0.0000 c(4) 511.6349 43.06389 11.88083 0.0000 r-squared 0.984707 mean dependent var 3590.353 adjusted r-squared 0.984463 s.d. dependent var 2774.293 s.e. of regression 345.8132 akaike info criterion 14.55029 sum squared resid 22482313 schwarz criterion 14.61815 log-likelihood -1392.828 durbin-watson stat 0.358974 dependent variable: m2 method: least squares sample(adjusted): 1365:01 1380:12 included observations: 192 after adjusting endpoints m2=c(11)*cpi+c(12)+c(13)*dummy8000+c(14)*dummy8000*cpi coefficien t std. error t-statistic prob. c(11) 1194.194 14.32809 83.34637 0.0000 c(12) -2595.321 790.6147 -3.282662 0.0012 c(13) -212425.6 9423.653 -22.54175 0.0000 c(14) 1565.863 60.77294 25.76579 0.0000 r-squared 0.994373 mean dependent var 82963.88 adjusted r-squared 0.994283 s.d. dependent var 81166.19 s.e. of regression 6137.162 akaike info criterion 20.30273 sum squared resid 7.08e+09 schwarz criterion 20.37059 log-likelihood -1945.062 durbin-watson stat 0.295806 -1000 0 1000 2000 3000 0 2000 4000 6000 8000 10000 66 68 70 72 74 76 78 80 residual actual fitted copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 60 dependent variable: cpi method: least squares sample(adjusted): 1365:01 1380:12 included observations: 192 after adjusting endpoints cpi=(c(21)+c(22)*dummy8000)*dollar+(c(23)+c(24) *dummy8000)*m2+c(25)+c(26)*dummy8000 coefficien t std. error t-statistic prob. c(21) 0.006521 0.000650 10.02795 0.0000 c(22) -0.007401 0.001988 -3.722975 0.0003 c(23) 0.000572 2.63e-05 21.75495 0.0000 c(24) -0.000231 2.93e-05 -7.896540 0.0000 c(25) -0.741588 0.492289 -1.506408 0.1337 c(26) 90.81921 17.52777 5.181447 0.0000 r-squared 0.997358 mean dependent var 65.82188 adjusted r-squared 0.997287 s.d. dependent var 55.94090 s.e. of regression 2.913712 akaike info criterion 5.007484 sum squared resid 1579.087 schwarz criterion 5.109281 log-likelihood -474.7185 durbin-watson stat 0.290870 -20000 -10000 0 10000 20000 30000 0 100000 200000 300000 400000 66 68 70 72 74 76 78 80 residual actual fitted -15 -10 -5 0 5 10 0 50 100 150 200 66 68 70 72 74 76 78 80 residual actual fitted 0 40 80 120 160 200 0 100000 200000 300000 400000 liquidity c on su m er p ric e in de x 0 2000 4000 6000 8000 10000 0 100000 200000 300000 400000 liquidity d o lla r r ia l e xc h a n g e r a te 0 40 80 120 160 200 0 5000 10000 dollar rial exchange rate co ns um er p ric e in de x copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 61 9. further study of co-integration in order to study the co-integration and concluding whether the mentioned relationships are long term relationships or not, we regress the first order difference of the residuals of each regression to its own lag. in this way, we conduct the unit root test. this study is shown in the next graphs. the results of these tests with the study of mackinnon show that all three equations have long term nature. in other words:  liquidity affects the foreign exchange rate in the long run.  prices affect liquidity in the long run.  in the long run, both liquidity and dollar rate affect prices. dependent variable: d(reseq1) method: least squares sample(adjusted): 1365:02 1380:12 included observations: 191 after adjusting endpoints variable coefficien t std. error t-statistic prob. reseq1(-1) -0.179557 0.041502 -4.326501 0.0000 r-squared 0.089617 mean dependent var 1.756606 adjusted r-squared 0.089617 s.d. dependent var 206.0912 s.e. of regression 196.6398 akaike info criterion 13.40585 sum squared resid 7346772. schwarz criterion 13.42287 log-likelihood -1279.258 durbin-watson stat 1.546716 dependent variable: d(reseq2) method: least squares sample(adjusted): 1365:02 1380:12 included observations: 191 after adjusting endpoints variable coefficien t std. error t-statistic prob. reseq2(-1) -0.137304 0.038807 -3.538106 0.0005 r-squared 0.061448 mean dependent var 65.24131 adjusted r-squared 0.061448 s.d. dependent var 3319.627 s.e. of regression 3216.017 akaike info criterion 18.99490 sum squared resid 1.97e+09 schwarz criterion 19.01192 log-likelihood -1813.013 durbin-watson stat 2.149772 -1200 -800 -400 0 400 800 1200 -1500 -1000 -500 0 500 1000 66 68 70 72 74 76 78 80 residual actual fitted copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 62 dependent variable: d(reseq3) method: least squares sample(adjusted): 1365:02 1380:12 included observations: 191 after adjusting endpoints variable coefficien t std. error t-statistic prob. reseq3(-1) -0.143351 0.037861 -3.786216 0.0002 r-squared 0.070105 mean dependent var 0.011469 adjusted r-squared 0.070105 s.d. dependent var 1.554762 s.e. of regression 1.499273 akaike info criterion 3.653060 sum squared resid 427.0858 schwarz criterion 3.670087 log-likelihood -347.8672 durbin-watson stat 2.238935 10. selling foreign exchange one of the variables which have not been used here is the selling of foreign exchange in the parallel market. as it was mentioned, the application of this policy can affect the monetary and exchange sectors of the economy. unfortunately, the monthly data for this variable is not available; the annual data as budget information is available in the central bank reports. these figures have been presented in the previous sections of this paper. studies show the relationship between this variable and the foreign exchange rate in the parallel market. the macro-econometric model of iran11 shows that there is a significant relationship between selling foreign exchange in the parallel market and dollar rate in that market. the following relationship has been defined in that model: dollar rate=f(selling exchange in parallel market, liquidity, cumulative balance of payments) the above study showed that it is not possible to find a significant relationship for the above function in the short 11 bidabad, 1996. http://www.bidabad.com/ -20000 -10000 0 10000 20000 -20000 -10000 0 10000 20000 66 68 70 72 74 76 78 80 residual actual fitted -8 -4 0 4 8 -8 -4 0 4 8 66 68 70 72 74 76 78 80 residual actual fitted http://www.bidabad.com/ copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 63 run, even though this function is statistically satisfactory. the reason for that is perhaps the lack of monthly data series of selling foreign exchange for a long period. as it was mentioned, there is a long term relationship between these variables; a concrete short-run relationship has not been found. the cross-correlogram below shows: selling foreign exchange with different lags has little effects with different directions on the parity rate of rial. the next graph shows the same conclusion for the relationship between liquidity and dollar rate. in other words, in spite of the existence of a relationship, in the long run, it is not possible to define such a relationship in the short run. the same is understood for the position of balance of payments and the foreign exchange rate in the short run, which is shown in the next table. sample: 1365:01 1381:12 included observations: 67 correlations are asymptotically consistent approximations d(dollar),d(dollarsal e)(-i) d(dollar),d(dollarsal e)(+i) i lag lead .*| . | .*| . | 0 0.140 7 0.140 7 . | . | . | . | 1 0.026 9 0.038 1 . |*. | . | . | 2 0.074 5 0.011 0 . | . | . |*. | 3 0.010 9 0.107 9 .*| . | .*| . | 4 0.045 4 0.101 7 .*| . | .*| . | 5 0.136 5 0.067 5 . | . | . |*. | 6 0.047 5 0.064 1 .*| . | .*| . | 7 0.105 3 0.063 2 . |*. | . | . | 8 0.108 4 0.019 0 . | . | .*| . | 9 0.028 0 0.108 1 **| . | .*| . | 1 0 0.204 8 0.078 9 . |*. | . | . | 1 1 0.114 2 0.027 1 . |** | . |*. | 1 2 0.160 5 0.050 1 . | . | . | . | 1 3 0.000 5 0.031 6 .*| . | **| . | 1 4 0.065 0.165 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 64 5 0 . | . | . | . | 1 5 0.021 8 0.000 1 . |*. | .*| . | 1 6 0.126 6 0.047 6 . |*. | .*| . | 1 7 0.055 0 0.068 9 . | . | . |*. | 1 8 0.008 6 0.074 7 . | . | **| . | 1 9 0.028 8 0.189 2 . | . | .*| . | 2 0 0.000 4 0.074 6 . | . | .*| . | 2 1 0.032 4 0.095 7 . |*. | . |*. | 2 2 0.067 8 0.099 3 . | . | . |*. | 2 3 0.038 7 0.050 0 .*| . | **| . | 2 4 0.044 0 0.192 8 . | . | .*| . | 2 5 0.002 5 0.129 9 . |*. | . | . | 2 6 0.090 9 0.006 9 . | . | . |*. | 2 7 0.008 6 0.123 6 . | . | **| . | 2 8 0.011 2 0.153 3 sample: 1365:01 1381:12 included observations: 203 correlations are asymptotically consistent approximations d(dollar),d(m2)(-i) d(dollar),d(m2)(+i) i lag lead *|. | *|. | 0 0.063 7 0.063 7 .|. | *|. | 1 0.003 2 0.104 6 .|* | .|. | 2 0.073 5 0.029 0 .|. | .|* | 3 0.001 0.094 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 65 8 5 *|. | *|. | 4 0.042 7 0.079 5 .|. | .|. | 5 0.039 4 0.022 8 .|. | .|. | 6 0.011 6 0.021 5 *|. | *|. | 7 0.047 8 0.097 2 .|. | *|. | 8 0.016 5 0.056 5 .|. | .|. | 9 0.020 2 0.026 5 *|. | .|* | 1 0 0.066 8 0.060 6 *|. | *|. | 1 1 0.054 7 0.060 8 .|. | .|. | 1 2 0.015 4 0.040 8 .|. | *|. | 1 3 0.024 6 0.043 2 .|. | .|. | 1 4 0.037 1 0.009 6 .|. | .|. | 1 5 0.016 7 0.030 3 .|. | *|. | 1 6 0.028 4 0.056 8 .|. | .|. | 1 7 0.030 6 0.008 6 .|. | .|* | 1 8 0.028 7 0.051 4 *|. | *|. | 1 9 0.056 6 0.043 0 .|. | *|. | 2 0 0.031 4 0.069 1 .|. | .|. | 2 1 0.042 3 0.014 6 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 66 .|. | .|** | 2 2 0.035 0 0.177 0 .|. | .|* | 2 3 0.036 4 0.062 5 .|. | .|* | 2 4 0.025 3 0.095 1 .|. | *|. | 2 5 0.011 0 0.041 3 .|. | .|. | 2 6 0.028 0 0.045 9 .|. | .|* | 2 7 0.015 5 0.105 2 .|. | .|* | 2 8 0.023 0 0.054 9 .|. | .|. | 2 9 0.012 1 0.049 1 .|. | .|* | 3 0 0.007 3 0.081 2 .|. | .|. | 3 1 0.036 3 0.022 0 .|. | .|. | 3 2 0.007 5 0.020 6 .|. | .|* | 3 3 0.018 5 0.122 7 .|. | .|** | 3 4 0.023 9 0.243 9 .|. | .|* | 3 5 0.005 9 0.050 5 .|. | .|* | 3 6 0.021 0 0.088 3 sample: 1365:01 1381:12 included observations: 47 correlations are asymptotically consistent approximations d(dollar),dnfad(-i) d(dollar),dnfad(+i) i lag lead . | . | . | . | 0 0.030 6 0.030 6 . | . | . | . | 1 0.038 5 0.038 6 . | . | . | . | 2 0.030 7 0.035 4 . | . | . | . | 3 0.012 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 67 0.026 1 4 . | . | . | . | 4 0.040 4 0.025 3 . | . | . | . | 5 0.047 1 0.040 8 . | . | . | . | 6 0.020 7 0.011 8 . | . | . | . | 7 0.010 1 0.036 8 . | . | . |* . | 8 0.016 3 0.054 9 . | . | . *| . | 9 0.038 3 0.127 5 . | . | .**| . | 1 0 0.029 6 0.181 8 . |* . | . |* . | 1 1 0.051 7 0.059 1 . | . | . |**. | 1 2 0.018 6 0.187 7 . | . | . |* . | 1 3 0.015 2 0.073 9 . | . | . | . | 1 4 0.023 9 0.042 0 . | . | . |* . | 1 5 0.010 9 0.098 4 . | . | . |* . | 1 6 0.008 5 0.078 8 . | . | . |**. | 1 7 0.008 3 0.182 9 . | . | . |**. | 1 8 0.007 0 0.210 9 . | . | .**| . | 1 9 0.001 8 0.209 9 . | . | *****| . | 2 0 0.002 4 0.516 7 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 68 11. simulation the analysis of the long-run relationship between selling foreign exchange in the parallel market, liquidity, and cumulative balance of payments with foreign exchange is shown by a regression. this analysis, which is based upon annual data contain these variables: irem = the parity rate of one dollar with rial irm2v = liquidity (billion rials) irboptd = balance of payments (million $) irgrdsv = sale of foreign exchange in the market (billion rials) ird99 = the dummy variable (equal to one in 1998) dependent variable: irem method: least squares date: 05/17/04 time: 11:01 sample(adjusted): 1960 2001 included observations: 42 after adjusting endpoints irem =irem(-1)+b(20011)*(irm2v-irm2v(-1))+b(20012)*irbopd +b(20013)*irgrdsv+b(20014)*ird99 coefficien t std. error t-statistic prob. b(20011) 0.055541 0.005340 10.40160 0.0000 b(20012) -0.032592 0.016491 -1.976378 0.0554 b(20013) -0.079829 0.008465 -9.430504 0.0000 b(20014) 1935.572 215.1956 8.994478 0.0000 r-squared 0.993304 mean dependent var 1455.924 adjusted r-squared 0.992775 s.d. dependent var 2421.946 s.e. of regression 205.8675 akaike info criterion 13.58274 sum squared resid 1610495. schwarz criterion 13.74823 log-likelihood -281.2374 durbin-watson stat 2.310237 the results show that in the short run, regulating foreign exchange rate by instruments such as selling foreign exchange in the market or by controlling liquidity is not possible, but in the long run, it is possible. for further study, consider these scenarios: scenario 0 (baseline): solving the equation with real exogenous variables scenario 1: 10 percent increase in liquidity (irm2v*1.1) scenario 2: 10 percent increase in selling foreign exchange in the market (irgdsv*1.1) scenario 3: one billion $ increase in the balance of payments (irbopd +1000) -1200 -800 -400 0 400 800 -2000 0 2000 4000 6000 8000 10000 60 65 70 75 80 85 90 95 00 residual actual fitted copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 69 these scenarios are defined by 0, 1, 2, and 3 in the next table, which are baseline solution and other mentioned solutions, respectively. the results of dynamic simulation show that a 10 percent increase in liquidity, causes 16.7 percent increase in the foreign exchange rate and a 10 percent increase in the foreign exchange sale in the parallel market will reduce the foreign exchange rate by 6.1 percent. this simulation has been carried out for 4 years (19982001). the results are presented in the next tables and graphs. baseline solution 1998 1999 2000 2001 irbopd -1572 1845 6529 4760 irem_0 (baseline) 5613. 4 7646.1 7171.1 6460.0 irgrdsv 6022 18532 39324 52445 irm2v 16040 2 192689 249111 320957 scenario 1 1998 1999 2000 2001 irbopd -1572 1845 6529 4760 irem_1 (scenario 1) 6391. 6 8580.9 8379.6 8017.1 irgrdsv 6022 18532 39324 52445 irm2v_1 (scenario 1) 17644 2 211958 274022 353053 scenario 2 1998 1999 2000 2001 irbopd -1572 1845 6529 4760 irem_2 (scenario 2) 5566. 5 7454.6 6672.8 5552.6 irgrdsv_2 (scenario 2) 6624 20385 43256 57690 irm2v 16040 2 192689 249111 320957 scenario 3 1998 1999 2000 2001 irbopd_3 (scenario 3) -572 2845 7529 5760 irem_3 (scenario 3) 5591. 3 7601.9 7104.7 6371.5 irgrdsv 6022 18532 39324 52445 irm2v 16040 2 192689 249111 320957 the simulated figures of the foreign exchange rate in the three scenarios 1998 1999 2000 2001 irem 6468.4 8657.7 8188.1 8008.4 irem_0 (baseline) 5613.4 7646.1 7171.1 6460.0 irem_1 (scenario 1) 6391.6 8580.9 8379.6 8017.1 irem_2 (scenario 2) 5566.5 7454.6 6672.8 5552.6 irem_3 (scenario 3) 5591.3 7601.9 7104.7 6371.5 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 70 the percentage change of foreign exchange rate in the parallel market in each scenario, relative to the results of the baseline solution is shown in the following table: 1998 1999 2000 2001 average irem_p_change_1 (scenario 1) 13.9 12.2 16.9 24.1 16.7 irem_p_change_2 (scenario 2) -0.8 -2.5 -6.9 -14.0 6.0 irem_p_change_3 (scenario 3) -0.39 -0.58 -0.93 -1.37 0.8 12. conclusion in this paper, our goal was to find out the effects of changes in money on the foreign exchange rate in the short run and long run. in other words, we were looking to find out if we can change foreign exchange rate by changing the liquidity? on the other hand, what is the effect of the price, which has an important catalyst role in this interaction? therefore, we looked for the triangular relationship between money, prices, and foreign exchange rate, through which we can reach foreign exchange rate control policies. calculations show that regulating foreign exchange rate by changing the amount of liquidity for a period of less than one year is not possible, and only the general level of prices can affect this variable. but in annual and biannual analysis, we can say that the control of the foreign exchange rate can be achieved through changes in liquidity. in other words, the long run trend of the foreign exchange rate is defined by liquidity and price level, but prices have also short term effect on the dollar rate. in the co-integration analysis, we checked whether the above relationships are credible for the long run or not. we concluded that:  liquidity affects dollar rate in the long run  prices affect liquidity in the long run  in the long run, liquidity and dollar rate affect the price level the long-run analysis with annual data shows that there is a significant relationship between selling foreign exchange in the parallel market. in other words, the dollar rate is a function of the cumulative balance of payments, liquidity, and the amount of dollar sold in the parallel market. the short-run analysis of the relationships shows that we cannot find a statistically significant relationship in this regard. in other words, there is only a long-run relationship between the variables, and there is not a clear short term relationship for them. the studies show that selling dollars in the market with different lags have small effects on the dollar rate in volatile directions. the same is true with the relationship of dollar rate and liquidity. that is to say, in spite of the existence of a long run relationship between dollar rate and liquidity, we cannot find this relationship for the short run. the same is true for the relationship between the balance of payments and liquidity in the short run. by simulation of the amount of foreign exchange sold in the parallel market, liquidity, and cumulative balance of payments with dollar rate, we can conclude that controlling foreign exchange rate in the short run by using tools such as selling foreign exchange in the parallel market or controlling the liquidity is not possible, but in the long run, 5500 6000 6500 7000 7500 8000 8500 9000 1998 1999 2000 2001 irem (baseline) irem (scenario 1) irem_2 irem_3 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 71 by the policy of selling foreign exchange and controlling the liquidity and the balance of payments, we can control the foreign exchange market. references a.j. hagger (1977) inflation theory & policy, 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( ارتباط اجزاء منابع و مصارف بانكها با بخشهاي پولي، ارزي و مالي و مغايرتهاي موجود در گزارش اقتصادي و ترازنامه 1373بيدآباد، بيژن ) بانك مركزي، وزارت امور اقتصادي و دارايي، معاونت امور اقتصادي. الي گزارش اقتصادي و ترازنامه بانك مركزي، معاونت اقتصادي و (، برخي ناهمخوانيها در حسابهاي پولي، ارزي و م1374بيدآباد، بيژن ) تكنولوژي، مركز تحقيقات استراتژيك، نهاد رياست جمهوري. -6صفحات – 84هاي اقتصاد شمارة ( بررسي اجمالي اثرات سياست فروش ارز در بازار غيررسمي اسعار خارجي، مجله تازه1377بيژن بيدآباد ) بانكي، بانك مركزي ايران.. پژوهشكدة پولي و 4 http://www.bcentral.c1/estudios/dtbc/69/dtbc69.pdf copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 73 گذاري در ايران، مركز پژوهشهاي مجلس شوراي اسالمي. ( امنيت اقتصادي و مروري بر موانع سرمايه1374بيژن بيدآباد ) اقتصاد از مجموعه مسائل اقتصاد كالن 4باشند؟ گزارش ( آيا ابزارهاي پولي بانك مركزي در كنترل حجم نقدينگي كافي مي1374بيژن بيدآباد ) ايران، مركز تحقيقات استراتژيك نهاد رياست جمهوري. از مجموعه مسائل اقتصاد 3( آيا تورم در ايران به غير از افزايش حجم نقدينگي علت اساسي ديگري نيز دارد، گزارش شماره 1374بيژن بيدآباد ) كالن، مركز تحقيقات استراتژيك نهاد رياست جمهوري. از مجموعة مسائل 2شود؟ گزارش شمارة آيا كاهش تورم در اثر كاهش رشد نقدينگي سبب كاهش رشد اقتصادي در ايران مي (1374بيژن بيدآباد ) اقتصاد كالن ايران، مركز تحقيقات استراتژيك نهاد رياست جمهوري. . 4زي ايران. ويرايش ( الگوي اقتصاد سنجي كالن ايران، مؤسسه تحقيقات پولي و بانكي، بانك مرك1375بيژن بيدآباد ) از مجموعه مسائل اقتصاد كالن 8گذاري را داشت؟ گزارش شمارة توان انتظار افزايش سرمايه ( آيا بدون امنيت اقتصادي مي1375بيژن بيدآباد ) ايران، مركز تحقيقات استراتژيك نهاد رياست جمهوري. پذيري حصول اهداف برنامه پنجساله اول توسعه اقتصادي، اجتماعي اقتصاد ايران و امكان ( تبيين پولي تورم در1369كميجاني، اكبر و بيژن بيدآباد ) و فرهنگي جمهوري اسالمي ايران، وزارت امور اقتصادي و دارايي، معاونت امور اقتصادي. طرح تحقيقاتي مرحله اول وزارت امور ( سياستهاي پولي مناسب جهت تثبيت فعاليتهاي اقتصادي در ايران،1370كميجاني، اكبر و بيژن بيدآباد ) اقتصادي و دارايي، معاونت امور اقتصادي. ( سياستهاي پولي و ارزي مناسب جهت تثبيت فعاليتهاي اقتصادي در ايران، طرح تحقيقاتي مرحله دوم، وزارت 1371كميجاني، اكبر و بيژن بيدآباد ) .امور اقتصادي و دارايي، معاونت امور اقتصادي گذاري براي كنترل تورم در ايران، ششمين كنفرانس سياستهاي پولي و ارزي، مؤسسه ( سياست هدف1376، محمد جعفر و بيژن بيدآباد )مجرد تحقيقات پولي و بانكي، بانك مركزي جمهوري اسالمي ايران. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). asian finance& banking review; vol. 2, no. 2; 2018 issn 2576-1161e-issn 2576-1188 impact factor: 3.3 published by centre for research on islamic banking & finance and business 42 determinants of firm’s leverage and theoretical examination: a study on the food and allied companies in bangladesh saptarshi chakma lecturer department of management rangamati science and technology university, rangamati received: december 7, 2018 accepted: december 16, 2018 online published: december 23, 2018 abstract leverage helps to understand how much debt and equity employed by a firm to funds its operation and asset. modigliani and miller are the path breaker in this sector. in 1958 identified irrelevancy proposition of firm leverage decision. in 1963 they came with their new explanation to incorporate the effect of tax. there are some other popular theories. jensen and meckling agency cost theory, scott trade off theory, ross signaling theory, myers and majluf pecking order theory are the most popular one. there are several determinants in firm leverage used in different studies. in this study, we used some most popular determinants. they are profitability, tangibility, growth, operating leverage, liquidity, size. in this study, nine dse listed food and allied companies’ data are used to analysis the relation between determinants and leverage and firm leverage theories are also tested for those companies. food and allied sector is a constant growing sector and good option for the investors. nine a category companies’ data are used for this study. for the data analysis descriptive data, hypothesis, correlation and regression method is used. leverage mean of last seven-year data is 48.5%. that means there is a good combination of debt and equity. in the hypothesis, t-test: paired two sample for means is used. null hypothesis only accepted for the tangibility determinants. that indicates there is a relationship between tangibility and leverage. in correlation matrix, it also showed that, leverage and tangibility have the strongest relation and the relation is negative. in regression model, only tangibility result is significant and the coefficient is negative. according to the result, pecking order theory, trade off theory and signaling theory play an important role in food and allied companies in bangladesh. the analysis showed that, companies with high tangibility ratio try to finance their operations by internal finance rather than debt finance and supported theories also refer the same result. keywords: capital structure, profitability, leverage, tangibility and liquidity. 1. introduction nowadays bangladesh is well known as a developing country with rapid growth economics. it has an ample scope for industrial development which would bring about positive outcome in the economy of our country. industry development is necessary for the development of infrastructure development. firm leverage is one of the most common and important theory in the field of finance. it is the most essential element to establish a company. firm leverage theory refers the amount of debt and equity used by a firm to finance its operations and assets. it indicates how firms finance their overall operations and growth by using debts like long-term notes payable and equity like common stock. the main components of firm leverage are debt and equity. a manager always looks to find out the optimal firm leverage to maximize the value of the firm and minimize the cost of capital. the purpose of this study is to examine the relation between leverage and determinants of firm leverage decision of food and allied companies in bangladesh. required data collected from 9 firms’ financial statement from consecutive seven years, from their audited balance sheet and income statement. the purpose of the study is to analyzes the result both descriptive and www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 43 statistical analysis. firm leverage become one of the most controversial issue in the field of corporate finance since the phenomenal work of modigliani & miller. most of the popular firm leverage researches are done under developed countries like rajan and zingales, 1995. only a few popular works done in bangladesh like chowdhury, 2004; lima, 2010; sayeed, 2012. but the numbers are increasing. 3. objective of the study to get a better output, several hypotheses (hp) were tested. the tested hypotheses are given below: these hypotheses will determine the firm leverage of food and allied firms in bangladesh: table 1. hypothesis table null hypothesis alternative hypothesis hp0: leverage ratios and profitability are associated. hp 1: leverage ratios and profitability are not associated. hp0: leverage ratios and growth are related. hp1: leverage ratios and growth are not related. hp0: leverage ratios and tangibility are linked. hp1: leverage ratios and tangibility are not linked. hp0: leverage ratios and liquidity are associated. hp1: leverage ratios and liquidity are not associated. hp0: leverage ratios and operating leverage are related. hp1: leverage ratios and operating leverage are not related. hp0: leverage ratios and size are corelated. hp1: leverage ratios and size are not corelated. 4. literature review there are several empirical studies regarding firm leverage decisions have been concisely reviewed here in terms of two segments both international evidence and evidence from bangladesh. in the year 1995, rajan and zingales had a rigorous study in this area where they came with an outcome that the various factors of firm leverage of us companies are size, growth, profitability and tangible assets. lima (2010) likewise guaranteed that development rate, substantial quality, working influence, obligation administration limit, administrative proprietorship age and size have huge impact on firm leverage choices. they additionally reasoned that the organization cost hypothesis and static exchange off hypothesis are pertinent for the organizations in bangladesh. 5. methodology of the study 5.1 data collection the number of inhabitants in the examination is the nourishment and associated firms in bangladesh. for this investigation, sequential seven-year information will be considered. along these lines 9 firms which have seven fiscal reports are fused right now. the organizations are browsed the rundown of dhaka stock exchange (dse) food and allied segment a classification firms. the organizations which used to gather the information are: ▪ agricultural marketing company ltd. (pran) ▪ apex foods limited ▪ british american tobacco bangladesh company limited ▪ fu wang food ltd. ▪ gemini sea food ltd. ▪ golden harvest agro industries ltd. ▪ national tea company ltd. ▪ olympic industries ltd. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 44 ▪ rangpur dairy (rd) & food products ltd. 5.2 analysis of data the gathered information through audit are utilized to broke down to both distinct and exact insights. graphic examination race to dissect the essential highlights of the information in the example. connection network is utilized to distinguish the relationship of every factor among them. various relapses are likewise used to decide the most significant informative factors influencing the firm leverageof nourishment and united firms in bangladesh. in association with this, the general model for this examination, as is for the most part found in the current writing is spoken to by yi,t= α + βxi,t + εi,t the subscript (i) representing the cross-sectional dimension and (t) denote the time-series dimension. the lefthand variable which is the firm’s debt ratios represents the dependent variable in the model. (xi,t) includes a number of independent variables estimated by the model. table 2. variables and indicators measurement of variables variables indicators depended variable leverage total debt/total asset independent variable profitability ebit/total asset tangibility fixed asset/total asset growth annual change in total asset operating leverage ebit/operating revenues liquidity total current asset/total current liabilities size natural logarithm of total asset 6. scope of the study the study mainly focuses on finding out the relationship between the leverage and the determinants of firm leverage (profitability, tangibility, growth, operating leverage, liquidity, size) of a specific sector food & allied sector nine listed a categorized company. seven consecutive year financial data are used. different statistical method used to find out the relation like hypothesis, correlation, regression. 7. limitations of the study there is always a predetermined system-imposed limitation of time, exists in any research work. but with the cooperation of my supervisor, it has become possible to complete the research work satisfactory within the time limit. the limitation of the study is given bellow: ▪ the study is restricted to a sample of only nine food & allied companies. ▪ this study is limited to seven fiscal years for the analysis. ▪ theories of books are for efficient market. these theories are not completely applicable for an inefficient market like bangladesh. ▪ all data are secondary data. 8. firm leverage theories firm leverage refers that how a firm used different source of funds to finance its overall operations and growth. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 45 there are two components of firm leverage– debt and equity. debt collected in the form of bonds, note-payable etc. and equity is classified in the form of common stock, preferred stock or retain earnings. it helps us to understand how much debt and/or equity employed by a firm to fund its operations and asset. it also helps us to understand the risk level of the firm. in general, high debt finance companies consider high risk exposure. 8.1 theories of capital structure modigliani & miller (m&m) path breaking article in 1958 which identified irrelevancy proposition of firm leverage decision to firm value on an assumption of perfect world with no taxes, no transaction costs, no bankruptcy costs, equivalence in borrowing costs for both companies and investors, symmetry of market information, meaning companies and investors have the same information, no effect of debt on a company's earnings before interest and taxes. the article showed that the benefit from debt financing –financing at a low rate will be offset by the increase in cost of equity derived from high financial risk perceived by the shareholders and individual project risk has no relation to the sources of fund it uses. so market value of a company and cost of capital are independent to the extent of debt in the capital structure. in m&m they came with their new explanation to incorporate the effect of tax in the model is that value of the firm would be maximized if it uses 100% debt in its firm leverage since interest payments are tax deductible. in 1977 miller new version of irrelevance theory reveals that firm leverage decision of a firm has no effect in real world of corporate and personal tax. there are some other popular theories come into light after a wide array of research conducted. they areagency cost theory, trade-off theory, signaling theory and pecking order theory. 8.1.1 agency cost theory agency cost theory developed by jensen and meckling in 1976, refers that optimal firm leverage can be found by minimizing agency cost arising from conflict of interest among managers, owners and debt holders. first conflict between firm managers and shareholders. firm manager directly deals with the agent on behalf of major shareholder interest. most of the firm manager wants to run large with high probability of risk. this tends to undertake negative npv projects. however, without a reward firm manager do not involve large and risky project even if they expect the project give positive npv. this problem creates a conflict of interest between managers and shareholders. as a consequence, the agency cost problem arises. sometime manager consumes firm valuable resources used their power (jensen and meckling, 1976). second conflict between firm managers and debt holders. managers are working for shareholders and they want to give priority shareholders interest. manager invests risky project that will benefit for major shareholder not better for the bondholder. bondholders also expect the manager invest safe and low return project that probability of risk is very low. thus, firm can pay their debt on time. but firm manager chooses risky projects that indicated a high probability of losing capital. if they lose, no cash available to paid their loan. most of the cases, shareholders prefer a firm manager invest risky project with high probability of success that they repaid their loan quickly and keep their ownership safe. if the risky project gave negative npv, then shareholder has possibility of defaulter. they can’t repay their loan on time. two ways are suggested to align managers interest with owners and debt-holders interest ▪ the first one is to increase the participation of the owners so that they can equally influence the decision taken by the manager. ▪ the second one is to increase the use of debt financing to minimize consumption in the perk. 8.1.2 trade-off theory trade-off theory developed by sco, refers that firms seek to have an optimum debt– equity ratio where marginal rise in tax benefit equals to the marginal increase of agency and bankruptcy cost generated from an extra use of leverage. financial manager taking firm debtequity decision based on a trade-off between cost of financial distress and interest tax shields. but there is a controversy arises in the firm. firm manager does not sure about www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 46 how valuable interest tax shield. and they do not predict what types of financial problem are harmful for companies. according to the trade-off theory assume that debt ratio will vary from firm to firm. firm with protected, tangible assets and high taxable income to shield indicate a high target ratio. 8.1.3 signaling theory signaling theory introduced in 1977, based on asymmetric information, refers that managers use leverage decision to give signal to the market because investors treat debt financing as a signal of high future performance and high future cash flows of the firm. therefore, the type of financing a company uses can provide a signal of the firm’s financial position and project prospects. when a company uses debt to fund a project, it could indicate that the company believes the project will provide returns quickly and sufficient enough to repay the debt so its current investors retain the benefits. if a company uses new equity to fund a capital project, it could be interpreted as either a signal that the company has no internal profits or is unable to raise any debt. 8.1.4 pecking order theory pecking order theory introduced in 1984, states that there is no optimal firm leverage and managers follow a hierarchy of preferences for the issuance of new capital based on the cost of capital. they prefer retained earnings as the main source of financing due to its zero cost and then debt financing, followed by equity financing, because cost of debt is less than that of equity. profitable firm borrow less amount debt because they have a low target ratio. this firms prefer internal finance when internal fund is sufficient to maximize the firm value and firm do not indicate any adverse signal that may lower the share price. less profitable firm issue more debt because they have not enough internal funds to regulate the companies smoothly. so, they relied on external financing. this firms prefer external finance when internal fund is insufficient to run the firm. in such case, firm issue debt financing first. then they go for equity finance. pecking order theories do not neglect taxes and cost of financial difficulties in case of determined capital structure. however, this theory assumes, those factors are less significant than firm managers’ decision about internal and external finance to issue more new capital structure. 9. determinants of capital structure there are several determinants used in different studies on determinants of capital structure. but we choose the most popular and common six determinants to find out the relationship between the determinants and the leverage. the determinants we used in this study are: ▪ profitability ▪ tangibility ▪ growth ▪ operating leverage ▪ liquidity ▪ size 9.1 profitability profitability is one of the most important determinants of firm leverage but there are different views in the relationship between leverage and profitability. trade off theory and signaling theory, have showed positive relation with the leverage. in trade off theory managers try to increase their leverage to raises their profitability by achieving the tax shield. in signaling theory managers use debt financing to finance their profitable investments. on the other hand, pecking order theory referred negative relation between leverage and profitability. they think, profitable firms borrow fewer amounts of debt and internal financing as a first choice. the profitability of a firm calculates as a ratio: profitability=ebit/total asset www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 47 9.2 tangibility one of the vital determinants of firm leverage is tangibility. trade off theory showed a positive relation between leverage and tangibility. it used as collateral of borrowed fund. in agency cost problem suggest that tangibility has negative correlation with information asymmetry problem. lower information asymmetry problem has lower dependence on debt and equity is more preferable. high tangibility capable firms high borrowing ability. tangibility calculates as: tangibility=fixed asset/total asset 9.3 growth growth is the determinants which are related with all the four theories we used in this study. singling theory and pecking order theory conclude a positive relationship in growth and leverage. they determine in their theories that companies with high growth have high debt capacity and tend to use external finance for their companies’ growth. jensen and meckling 1976, agency cost theory and trade off theory provides different opinion about growth. they think there is a negative relation between growth and leverage. high growth firm tend to use low external finance to reduce agency cost between firm managers and debt holders. in trade off theory high growth companies used low debt ration because their target ratio is low. growth ratio calculates as: growth=annual change in total asset 9.4 operating leverage operating leverage is the determinants which influence trade off and pecking order theory. in trade off theory, there is a positive relation between operating leverage and leverage ratio. higher operating leverage indicates higher risk of the firms. since the managers does not sure about how valuable interest tax shield and they do not predict what types of financial problem are harmful for companies. they take more risk and used debt finance. in pecking order theory show negative relation between operating leverage and leverage because high risk firm use low leverage to reduce risk. operating leverage ratio calculate as: operating leverage =ebit/operating revenues 9.5 liquidity liquidity is one of the most important determinants of capital structure. but there is a controversy about the relation between liquidity and leverage ratio. trade off theory refers that there is a positive relation between liquidity and leverage ratio. firms with high liquidity are more capable to pay their debt. so highly liquid firm tend to use high debt finance. on the other hand, pecking order theory refers that there is a negative relation between liquidity and leverage. highly liquid firms used internal finance rather than external finance. liquidity ratio calculate as: liquidity=total current asset/total current liabilities 9.6 size size of the firm is a determinant of capital structure. according to trade off theory there is a positive relation between size and leverage. large size firms have low bankruptcy cost and high capacity to get external finance. because of diversification large firms maximize their tax benefits form debt. in signaling theory, firm with high debt finance provide signals to the investors that the firm is in a profitable position and has the ability to quick repay of the loan. so it also refers that, there is a positive relation between size and leverage. but according to pecking order theory, there is a negative relation between size and leverage. because large firms prefer internal finance first than external finance. size calculates as: www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 48 size=natural logarithm of total asset in the table below summarize the relations among the determinants of firm leverage (independent variables) and the theories of capital structure. most popular four firm leverage theories are used in this table and the six mostly used determinants of firm leverageare used in this table. in this table (+) sign uses to indicate positive relation and (-) sign used to indicate negative relation. table 3. theoretical expectation of variables theoretical expectation independent variables agency cost trade-off signaling pecking order profitability + + tangibility +/+ growth + + operating leverage + liquidity + size + + 10. food and allied sector of bangladesh food and allied sector is a growing sector in our country. this sector considers as one of the constant growth sectors in dhaka stock exchange (dse). the price return and change in turnover is positive in this sector for the last year. the foreign investment is increasing in this sector. there are eighteen (18) companies listed in dse food & allied sector. in this eighteen companies nine companies are a category one is b category and the rest eight companies are z category. in our study we use only the a category companies’ information. the list is: ▪ agricultural marketing company ltd. (pran) ▪ apex foods limited ▪ british american tobacco bangladesh company limited ▪ fu wang food ltd. ▪ gemini sea food ltd. ▪ golden harvest agro industries ltd. ▪ national tea company ltd. ▪ olympic industries ltd. ▪ rangpur dairy & food products ltd. 10.1 agricultural marketing company ltd. (pran) program for rural advancement nationally (pran) group was born in 1980. they are the largest processors of fruits and vegetables in bangladesh and well known for diversify activities. the main purpose is to enrich the agricultural sector since our economy is agricultural based and develop our native farmers. they are also one of the biggest exporter in our country. pran listed in dse in 1996 and now their market category is a. 10.2 apex foods limited apex foods limited incorporated their business on 1979. apex sea food is the single largest processor and www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 49 exporter of frozen sea food of bangladesh. they are well known in the worldwide for their high quality products. they export their product in north america, eu countries, australia and russia. apex foods limited listed in dse in 1981 and now their market category is a. 10.3 british american tobacco bangladesh company limited in 1998 bangladesh tobacco company change their name as a british american tobacco bangladesh company limited and aligning the corporate identity with other operating companies in the british american tobacco group. it is one of the world largest international business and sold their products more than 200 markets all over the world. they are well known for their quality tobacco and diversification according to consumer choice. they listed in dse in 1977. 10.4 fu wang food ltd. fu wang food ltd. start their business in 1997 and certified in 1998. they introduce variety of products to cover the market. they have different food items like bred, biscuit, cake, toast, chocolate, instant noodles, drinking water, energy drink etc. fu wang food listed in dse in 2000. 10.5 gemini sea food ltd. gemini sea food ltd. start their business in 1982. the main target this firm is to provide quality product according customer requirement. they believe that “hygienic product healthy trade”. they export our quality products to u.s.a & eu countries like u.k, germany, denmark, netherlands, belgium and russia etc. they listed in dse in 1985. 10.6 golden harvest agro industries ltd. golden harvest agro industries ltd. is a company of golden harvest group. it is one of the pioneer frozen food manufacturing companies in our country. they are well known for their good quality and tasty frozen foods both locally and internationally. they export their product in usa, canada, australia, middle east and the european countries. they listed in dse in 2014. 10.7 national tea company ltd. national tea company ltd. starts their business in 1978 as a joint venture and government and its financial organization holds majority of the share (51%) and the rest are owned by the general public. this company owned 12 tea estates which cover almost fifty percent of the total tea cultivation area. it sold 5.20 million kg. tea through chittagong auction market annually. national tea company ltd. listed in dse in 1979. 10.8 olympic industries ltd. olympic industries ltd. incorporates their business in 1979 as a battery manufacturer but later they diversify their business by manufacturing biscuits and confectionary items in 1996. today they are the largest biscuit manufacturer in bangladesh. they think quality of their products and loyalty to their customers make olympic so popular. olympic listed in dse in 1989. 10.9 rangpur dairy & food products ltd. they collect the raw milk from the northern part of our country and processed the raw milk in ultra high temperature (uht). it also reduces the risk of infection. they use high quality packaging system to maintain the milk for long time. rangpur dairy & food products ltd. listed in dse in 2011. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 50 11. analysis of the study 11.1 descriptive statistics in this study we examine the nine food and allied listed companies’ seven-year data. here we showed the mean, standard deviation, maximum and minimum value of the ratios. table 4. data descriptions variable mean max min standard deviation leverage 0.485113 1.022036 0.047937 0.252917 profitability 0.134335 0.514757 -0.03007 0.126493 tangibility 0.445406 0.843248 0.046722 0.213776 growth 0.159228 1.129147 -0.27103 0.229247 operating leverage 0.127053 0.449611 -0.01945 0.112153 liquidity 3.132551 77.13767 0.678286 9.592806 size 20.58751 22.93377 16.39201 1.542438 leverage means is 48.5% which indicates equity used in this sector as 51.5%. that means leverage and equity portion almost equal in this sector which indicates a good combination of debt and equity. standard deviation is 25% in leverage ratio. profitability in these companies is positive and it is 13% which refers profitability of those companies is 13%. it is good sign for food & allied companies in bangladesh. in profitability minimum value is -3% and maximum value is 51.5%, there is huge gape in these two values and that’s why the standard deviation is 13.5%. tangibility is the fixed asset portion of a firm. here the average is almost 44%. that means the firms have a large portion of fixed assets. in tangibility minimum value 4.7% and maximum value 84%. the standard deviation is 21%. growth is 16% which means that the firms growth last seven years is 16% which is positive and good enough. it refers that firms in this sector growing year to year. standard deviation is 23%. operating leverage calculate as a ebit to operating revenues. operating leverage mean is 12.7% which means earnings of the firms after basic costs. so the earnings ratio of the firm over last seven years is positive and quiet satisfactory. standard deviation is 11%. liquidity is 3.13 which means firms are not use their liquid asset efficiently and their performance is not satisfactory. they should use more their liquid asset in their business activities. standard deviation is 9.6. size of the firm is another determinant of firm leverage calculates as a natural logarithm of total asset. the mean of the firm’s total asset natural logarithm over last seven years is 20.58 and the standard deviation is 1.54. 11.2 hypothesis t-test: paired two samples for means is used. significance level is 5%. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 51 table 5. hypothesis result t-test: paired two samples for means is used. significance level is 5%. null hypothesis alternative hypothesis result hp0: leverage ratios and profitability are associated. hp 1: leverage ratios and profitability are not associated. hp0 hypothesis rejected hp0: leverage ratios and growth are related. hp1: leverage ratios and growth are not related. hp0 hypothesis rejected hp0: leverage ratios and tangibility are linked. hp1: leverage ratios and tangibility are not linked. hp0 hypothesis accepted hp0: leverage ratios and liquidity are associated. hp1: leverage ratios and liquidity are not associated. hp0 hypothesis rejected hp0: leverage ratios and operating leverage are related. hp1: leverage ratios and operating leverage are not related. hp0 hypothesis rejected hp0: leverage ratios and size are corelated. hp1: leverage ratios and size are not corelated. hp0 hypothesis rejected h0 accepted or rejected based on the p value and the t-stat value of the result. if p value is lower than .05 than reject the null hypothesis and if p value is greater than or equal .05 than accept the null hypothesis. if t-stat value is greater than t critical value than reject the null hypothesis otherwise we accept the null hypothesis. according to these two conditions only tangibility and leverage null hypothesis is accepted. that means there is relationship between leverage ratios and tangibility. all other determinants relation with leverage is rejected because of lower p value and higher t-stat value. 11.3 correlation in this correlation matrix, showed the relation between the dependent variable (leverage) and independent variables (profitability, tangibility, growth, operating leverage, liquidity, size). it also showed the internal relations among the independent variables. table 6. correlation matrix leverage profitability tangibility growth operating leverage liquidity size leverage 1 profitability 0.162528711 1 tangibility -0.637004421 -0.100731037 1 growth 0.089690154 0.117833829 -0.17938 1 operating leverage -0.5237648 0.002155883 0.597904 0.159278 1 liquidity 0.12614236 0.046138026 -0.09529 -0.06436 -0.08701 1 size -0.252793763 -0.655249788 0.151824 0.072891 0.314651 -0.09575 1 the correlation matrix showed that leverage has positive relation with profitability. it indicates that firms which have high profitability ratio have preference to use debt finance. leverage has also positive relation with growth and liquidity. tangibility, operating leverage and size have negative relation with leverage. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 52 p value is one of the most important determinants in the regression model. if p value is lower than or equal 0.05 indicates, there is a strong relationship between dependent and independent variable. in this table, only tangibility and liquidity p value is lower than 0.05. so these variables are considered significant. t-stat is a statistic that indicates the size of an effect, from the standpoint of a bell curve (a probability distribution). the further away from zero (0) the more likely that the effect is "statistically significant". in this table, only tangibility variables t stat value is greater than 2. so this variable is significant. coefficient represent the beta which refers risk. the first intercept coefficient represents the constant value of the regression model. so the regression model is: yi,t= α + βxi,t + εi,t if we elaborate the model: yi= α + β*profitability + β*tangibility + β*growth + β*operating leverage + β*liquidity + β*size yi= 0.998598508+0.126890261 * profitability+(-0.564312855) * tangibility+0.044125089 * growth+( 0.494013774) * operating leverage+ 0.001445136* liquidity+( -0.01107319) *size 11.4 testing of firm leverage theories theories showed the relation between the determinants and leverage ratios. they should be positive and negative. according to the different statistical analysis we find the relation between the determinants and the leverage ratio. now we find out which theories fit for the determinants of firm leverageand leverage ratio of food and allied companies in bangladesh. in this table below, showed the relation between the determinants and leverage ratio according to theories and in terms of the data analysis. table 7. determinants findings and supporting theories. theoretical expectation findings supporting theory independent variables agency cost trade off signaling pecking order profitability + + + trade-off, signaling tangibility +/+ pecking order growth + + + signaling & pecking order operating leverage + pecking order liquidity + + trade-off size + + pecking order the finding is that tangibility, growth, operating leverage and size follow pecking order theory. they have also negative relation with leverage except growth. the rest two profitability and liquidity follow trade off theory. profitability and growth also follow signaling theory. they both are positive that means they provide the investors a positive signal. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 53 12. findings of the study according to correlation matrix there is a positive relation between profitability and leverage ratio. the coefficient of profitability is also correct. that means high profitable firms prefer debt finance for their business operations. because of high profitability they have the ability to pay the debt and also excess of loan. tangibility is the only determinants which has significant value in regression model and also show strong relation in correlation matrix. in hypothesis, tangibility h0 also accepted. there is a negative relation between tangibility and leverage which indicates firms with high fixed asset tend to use internal finance. though, they have easy access of loan because of large amount of fixed asset. the relation between growth and leverage is not so significant. the correlation value is very low but correlation and coefficient value is positive. operating leverage has a strong negative relation with leverage. that means companies with high income prefer to use their internal finance like retain earnings rather than external finance. liquidity has very low value in correlation and insignificant in regression model. though the value is very low but the relation is positive. size has a negative correlation with leverage. that refers that, large size companies use more internal finance and less external finance. packing order theory and trade-off theory have great impact on food and allied companies in bangladesh. packing order theory is followed because of internal financing like retain earnings and trade off theory followed because manager tend to take less risk that’s why they try to avoid external financing. signaling theory also play important role in this sector. 13. conclusion the determinants of capital are not strongly influence the leverage decision of food and allied sector in bangladesh except tangibility. tangibility is the determinants which has significant value and relation with leverage. there is a negative relation between leverage and tangibility. companies high fixed asset have high tangibility ratio prefer internal finance compare to external finance for their business operations. in the theories of capital structure, packing order theory and trade-off theory have great impact on our food and allied companies in bangladesh. packing order theory suggest to use internal finance like retain earnings due to its zero cost and in trade off theory manager taking firm debt-equity decision based on a trade-off between cost of financial distress and interest tax shields. references chowdhury, m. u. (2004); firm leverage determinants: evidence from japan & bangladesh; journal of business studies, xxv (1), 23-45. jensen, m., & meckling, w. (1976); theory of the firm: managerial behavior, agency costs and ownership structure; journal of financial economics, 3(4), 305-360. lima, m. (2010); an insight into the firm leverage determinants of the pharmaceutical companies in bangladesh; gbmf conference, 2010. rajan, r. g., & zingales, l (1995); what do we know about capital structure? some evidence from international data; journal of finance, 50, 1421-1460. sayeed, a. m. (2012). the determinants of firm leverage for selected bangladeshi listed companies; international review of business research papers, 7(2), 21-36. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 54 appendix nine companies last seven years data year company name total debt total current liabilities total asset fixed asset total current asset operating revenues ebit 2017 apex food ltd 1102179 663 1077907 226 1758501 536 3855338 16 1372967 720 16427721 07 4469543 2016 9261507 63 8831010 97 1545510 181 3599302 52 1185579 929 20319469 45 -20800413 2015 1157463 237 1104763 634 1779946 562 3307064 94 1449240 068 27517798 85 -53525355 2014 1130977 648 1040962 126 1693029 263 3726989 73 1320330 290 38446812 56 31319044 2013 1240793 403 1128293 403 1758652 867 3500994 01 1408553 466 33057172 80 20664243 2012 1019973 962 8774739 62 1571415 244 3490459 84 1222369 260 39333461 04 18734510 2011 1079963 920 9302018 88 1485155 738 2169777 00 1268176 843 32073147 33 9059599 2010 1136280 606 2017 british american tobacco 1646500 1 1363696 5 3534758 3 1541187 3 1993571 0 16563376 0 13926734 2016 1498131 2 1245028 6 2959083 1 1366501 5 1592581 6 14371166 4 13200527 2015 1561150 9 1410283 5 2707501 9 1201857 6 1505644 4 12680460 2 11534652 2014 9562208 8314769 1846379 8 8513167 9950631 10958171 0 9504368 2013 8001553 7029777 1503449 3 5861627 9172866 90174080 6912702 2012 7239749 6300705 1315104 9 5376634 7774415 75357351 5246089 2011 7128724 6323404 1336943 3 5315562 8053871 65986503 3145629 2010 1201956 5 2017 4802167 54 3841025 20 1581852 767 5640893 36 9767634 31 58678768 7 101924432 2016 4432930 62 3866021 33 1482203 822 5585534 62 8736503 60 76710939 2 134364942 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 55 2015 fu-wang foods ltd. 3914561 48 3254515 90 1343232 984 5122796 20 7809533 64 81985185 0 169903795 2014 3406547 10 2625633 29 1179301 123 4799823 40 6493187 83 79440601 4 104922031 2013 2926293 79 2617136 38 1070394 684 4834268 76 5369678 08 78512652 5 107712285 2012 2601093 46 2601093 46 9998698 91 4751656 49 4747312 42 75845905 0 114100545 2011 2451310 79 2451310 79 8795389 42 3879200 56 4718147 28 70916856 8 117527552 2010 5428772 82 2017 pran(agric ultural marketing com. ltd.) 8892357 03 7258336 66 1463022 240 4741943 53 9888278 87 23803354 93 193375561 2016 9148193 65 6975322 12 1459268 485 5446370 29 9146314 56 20915538 54 190285679 2015 9886606 91 5398162 78 1505711 652 6580816 31 8476300 21 18865053 85 73888029 2014 6088439 75 5412394 63 1095910 217 3418084 93 7541017 24 17272176 69 74278680 2013 6510617 87 5655367 87 1137169 643 3389773 11 7981923 32 15544468 36 70621379 2012 7112438 21 5762903 21 1167556 801 3896744 99 7778823 02 14790834 63 69884451 2011 7424684 82 5917684 82 1172667 837 4158256 88 7568421 49 13163455 76 58060062 2010 1115683 180 2017 olympic 3707466 711 3408642 811 9120317 797 2363826 358 6756491 439 11290557 541 215312959 4 2016 3109495 848 2859716 979 7640768 208 1963251 175 5677517 033 10965042 877 211644008 0 2015 2382025 686 1988098 981 5763679 785 1909946 076 3853733 709 89961485 94 143117004 7 2014 2526239 640 1977232 044 5048637 186 1869464 492 3179172 694 79223538 76 118491576 9 2013 1767679 547 1517602 918 3693672 553 1432816 473 2260856 080 70931793 69 931270071 2012 1294469 294 1037540 875 2591236 306 1201849 350 1389386 956 60033420 18 697570228 2011 1005533 832 8622446 37 1850322 260 7742549 33 1076067 327 38851018 24 392222519 2010 1361913 744 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 56 2017 golden harvest agro industries ltd. 1026466 518 7055677 43 5044390 614 3573568 441 1470822 173 62443865 7 221338024 2016 9917837 36 4796108 99 4006564 213 2750054 728 1256509 485 52056381 3 214765123 2015 9575501 12 4692200 55 3440355 786 2112805 705 1327550 081 47207772 9 124412913 2014 6034123 35 4618579 23 2614274 832 1293112 465 1321162 367 41869057 5 156521438 2013 4279623 35 3600029 68 1549432 414 1024677 371 3752263 05 35071920 2 113056661 2012 2583723 00 1872380 64 1151988 069 9276869 81 2243010 88 30435398 2 136840856 2011 2658794 15 2016846 78 1283278 696 9112658 41 3256482 05 28365487 9 125846782 2010 1020135 468 2017 gemini sea food ltd. 7290579 44 7224131 98 7720125 28 3607012 3 7359414 05 13551241 37 70247040 2016 3389941 59 3323932 27 3625919 31 3765275 5 3249391 76 11121376 64 56276303 2015 3715539 50 3648100 30 3740189 41 4041399 0 3336049 51 90523889 5 43953578 2014 2197907 05 2121941 05 2150519 08 4077736 4 1742745 44 95454056 8 45400224 2013 3012788 79 2933009 19 2950073 07 4272013 0 2522871 87 76697116 2 34228981 2012 2065428 23 2208579 2171978 48 4683320 5 1703646 43 12162930 05 47546426 2011 1878526 40 1523589 72 2015683 95 4827785 6 2315680 54 10050265 43 42356847 2010 2348855 64 2017 national tea company 1189238 971 5928652 70 2132951 221 1730819 005 4021322 16 98566997 4 104392614 2016 1170799 425 6565240 21 2072299 643 1621391 111 4509085 33 95934410 4 163120468 2015 9999104 50 4949059 54 1930693 798 1574521 010 3561727 88 34965317 0 20011608 2014 9714636 34 5124318 34 1804403 178 1448875 981 3555271 97 83773240 1 61597345 2013 9052079 34 4460937 22 1730513 915 1325131 628 4053822 87 85681691 0 181875020 2012 8023525 34 3551234 63 1528704 254 1215198 919 3135053 35 89197157 3 263175480 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 57 2011 7563258 91 2495284 31 1417909 243 1195648 702 2536954 84 92158467 5 285648206 2010 1323930 070 2017 rd & food products ltd. 1236094 41 1071474 00 1104929 064 7048319 77 4000970 87 53243092 4 52549104 2016 9930816 6 8712380 6 1045252 046 6885111 74 3567408 72 49443387 1 42863417 2015 8319358 6 7322633 9 1012279 083 6745009 76 3377781 07 46858950 7 41440980 2014 5476659 6 4776429 8 9493098 64 6290847 28 3202251 36 46779555 8 48223587 2013 4296593 9 3733873 3 8963089 20 5888036 02 3075053 18 43242251 3 49893432 2012 5677442 3 5257078 0 8864774 35 5880305 02 2984469 33 39309637 3 44795983 2011 6052823 5 4275896 7 9789004 61 5236984 70 2754478 26 35401295 8 40198752 2010 8834958 73 ratios no . year company name leverage profitab ility tangibility growth operating leverage liquid ity size 1 2017 apex food ltd 0.63 0.00 0.22 0.14 0.00 1.27 21.3 2 2016 0.60 -0.01 0.23 -0.13 -0.01 1.34 21.2 3 2015 0.65 -0.03 0.19 0.05 -0.02 1.31 21.3 4 2014 0.67 0.02 0.22 -0.04 0.01 1.27 21.2 5 2013 0.71 0.01 0.20 0.12 0.01 1.25 21.3 6 2012 0.65 0.01 0.22 0.06 0.00 1.39 21.2 7 2011 0.73 0.01 0.15 0.31 0.00 1.36 21.1 8 2010 0.47 0.39 0.44 0.19 0.08 1.46 17.4 9 2017 british american tobacco 0.51 0.45 0.46 0.09 0.09 1.28 17.2 10 2016 0.58 0.43 0.44 0.47 0.09 1.07 17.1 11 2015 0.52 0.51 0.46 0.23 0.09 1.20 16.7 12 2014 0.53 0.46 0.39 0.14 0.08 1.30 16.5 13 2013 0.55 0.40 0.41 -0.02 0.07 1.23 16.4 14 2012 0.53 0.24 0.40 0.11 0.05 1.27 16.4 15 2017 fu-wang foods ltd. 0.30 0.06 0.36 0.07 0.17 2.54 21.2 16 2016 0.30 0.09 0.38 0.10 0.18 2.26 21.1 17 2015 0.29 0.13 0.38 0.14 0.21 2.40 21 18 2014 0.29 0.09 0.41 0.10 0.13 2.47 20.9 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 58 19 2013 0.27 0.10 0.45 0.07 0.14 2.05 20.8 20 2012 0.26 0.11 0.48 0.14 0.15 1.83 20.7 21 2011 0.28 0.13 0.44 0.62 0.17 1.92 20.6 22 2017 pran(agricul tural marketing com. ltd.) 0.61 0.13 0.32 0.00 0.08 1.36 21.1 23 2016 0.63 0.13 0.37 -0.03 0.09 1.31 21.1 24 2015 0.66 0.05 0.44 0.37 0.04 1.57 21.1 25 2014 0.56 0.07 0.31 -0.04 0.04 1.39 20.8 26 2013 0.57 0.06 0.30 -0.03 0.05 1.41 20.9 27 2012 0.61 0.06 0.33 0.00 0.05 1.35 20.9 28 2011 0.63 0.05 0.35 0.05 0.04 1.28 20.9 29 2017 olympic 0.41 0.24 0.26 0.19 0.19 1.98 22.9 30 2016 0.41 0.28 0.26 0.33 0.19 1.99 22.8 31 2015 0.41 0.25 0.33 0.14 0.16 1.94 22.5 32 2014 0.50 0.23 0.37 0.37 0.15 1.61 22.3 33 2013 0.48 0.25 0.39 0.43 0.13 1.49 22 34 2012 0.50 0.27 0.46 0.40 0.12 1.34 21.7 35 2011 0.54 0.21 0.42 0.36 0.10 1.25 21.3 36 2017 golden harvest agro industries ltd. 0.20 0.04 0.71 0.26 0.35 2.08 22.3 37 2016 0.25 0.05 0.69 0.16 0.41 2.62 22.1 38 2015 0.28 0.04 0.61 0.32 0.26 2.83 22 39 2014 0.23 0.06 0.49 0.69 0.37 2.86 21.7 40 2013 0.28 0.07 0.66 0.35 0.32 1.04 21.2 41 2012 0.22 0.12 0.81 -0.10 0.45 1.20 20.9 42 2011 0.21 0.10 0.71 0.26 0.44 1.62 21 43 2017 gemini sea food ltd. 0.94 0.09 0.05 1.13 0.05 1.02 20.5 44 2016 0.93 0.16 0.10 -0.03 0.05 0.98 19.7 45 2015 0.99 0.12 0.11 0.74 0.05 0.91 19.7 46 2014 1.02 0.21 0.19 -0.27 0.05 0.82 19.2 47 2013 1.02 0.12 0.14 0.36 0.04 0.86 19.5 48 2012 0.95 0.22 0.22 0.08 0.04 77.14 19.2 49 2011 0.93 0.21 0.24 -0.14 0.04 1.52 19.1 50 2017 national tea company 0.56 0.05 0.81 0.03 0.11 0.68 21.5 51 2016 0.56 0.08 0.78 0.07 0.17 0.69 21.5 52 2015 0.52 0.01 0.82 0.07 0.06 0.72 21.4 53 2014 0.54 0.03 0.80 0.04 0.07 0.69 21.3 54 2013 0.52 0.11 0.77 0.13 0.21 0.91 21.3 55 2012 0.52 0.17 0.79 0.08 0.30 0.88 21.1 56 2011 0.53 0.20 0.84 0.07 0.31 1.02 21.1 57 2017 0.11 0.05 0.64 0.06 0.10 3.73 20.8 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 59 58 2016 rd & food products ltd. 0.10 0.04 0.66 0.03 0.09 4.09 20.8 59 2015 0.08 0.04 0.67 0.07 0.09 4.61 20.7 60 2014 0.06 0.05 0.66 0.06 0.10 6.70 20.7 61 2013 0.05 0.06 0.66 0.01 0.12 8.24 20.6 62 2012 0.06 0.05 0.66 -0.09 0.11 5.68 20.6 63 2011 0.06 0.04 0.53 0.11 0.11 6.44 20.7 hypothesis t-test: paired two sample for means leverage profitability mean 0.485113459 0.134335175 variance 0.063966837 0.016000565 observations 63 63 pearson correlation 0.162528711 hypothesized mean difference 0 df 62 t stat 10.55596582 p(t<=t) one-tail 8.84586e-16 t critical one-tail 1.669804163 p(t<=t) two-tail 1.76917e-15 t critical two-tail 1.998971517 t-test: paired two sample for means leverage tangibility mean 0.485113459 0.445406088 variance 0.063966837 0.045700274 observations 63 63 pearson correlation -0.63700442 hypothesized mean difference 0 df 62 t stat 0.745867839 p(t<=t) one-tail 0.229282948 t critical one-tail 1.669804163 p(t<=t) two-tail 0.458565896 t critical two-tail 1.998971517 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 60 t-test: paired two sample for means leverage growth mean 0.485113459 0.159227798 variance 0.063966837 0.052554099 observations 63 63 pearson correlation 0.089690154 hypothesized mean difference 0 df 62 t stat 7.940284723 p(t<=t) one-tail 2.51173e-11 t critical one-tail 1.669804163 p(t<=t) two-tail 5.02347e-11 t critical two-tail 1.998971517 t-test: paired two sample for means leverage operating leverage mean 0.485113459 0.12705305 variance 0.063966837 0.012578328 observations 63 63 pearson correlation -0.5237648 hypothesized mean difference 0 df 62 t stat 8.718548815 p(t<=t) one-tail 1.13167e-12 t critical one-tail 1.669804163 p(t<=t) two-tail 2.26333e-12 t critical two-tail 1.998971517 t-test: paired two sample for means leverage liquidity mean 0.485113459 3.132551199 variance 0.063966837 92.02192553 observations 63 63 pearson correlation 0.12614236 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 61 hypothesized mean difference 0 df 62 t stat -2.19708905 p(t<=t) one-tail 0.015880062 t critical one-tail 1.669804163 p(t<=t) two-tail 0.031760124 t critical two-tail 1.998971517 t-test: paired two sample for means leverage size mean 0.485113459 20.58751243 variance 0.063966837 2.379115398 observations 63 63 pearson correlation -0.25279376 hypothesized mean difference 0 df 62 t stat -98.1951863 p(t<=t) one-tail 4.70512e-70 t critical one-tail 1.669804163 p(t<=t) two-tail 9.41024e-70 t critical two-tail 1.998971517 regression summary output regression statistics multiple r 0.675622233 r square 0.456465402 adjusted r square 0.398229552 standard error 0.001961972 observations 63 anova df ss ms f significance f regression 6 1.810316186 0.301719364 7.838219976 3.79532e-06 residual 56 2.155627738 0.038493352 total 62 3.965943924 coefficients standar d error t stat p-value lower 95% upper 95% lower 95.0% upper 95.0% intercept 0.9986 0.5218 1.9137 0.0608 -0.0467 2.0439 -0.0467 2.0439 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 62 profitability 0.1269 0.2816 0.4506 0.6540 -0.4372 0.6910 -0.4372 0.6910 tangibility -0.5643 0.1580 -3.5717 0.0007 -0.8808 -0.2478 -0.8808 -0.2478 growth 0.0441 0.1186 0.3721 0.7112 -0.1934 0.2817 -0.1934 0.2817 operating leverage -0.4940 0.3214 -1.5369 0.1299 -1.1379 0.1499 -1.1379 0.1499 liquidity 0.0014 0.0026 0.5503 0.5843 -0.0038 0.0067 -0.0038 0.0067 size -0.0111 0.0241 -0.4591 0.6480 -0.0594 0.0372 -0.0594 0.0372 copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) copyright © cc-by-nc 2019, cribfb | asfbr asian finance & banking review; vol. 3, no. 2; 2019 issn 2576-1161 e-issn 2576-1188 published by centre for research on islamic banking & finance and business, usa 7 general characteristics of rastin banking bijan bidabad b.a., m.sc., ph.d., post-doc. professor economics and chief islamic banking advisor, bank melli, iran e-mail:bijan@bidabad.com abstract in addition to removing riba in banking activities, and by observing islamic banking principles, and creating safe and public confidence environment, rastin banking can lead to important positive effects on growth and economic welfare through money and capital markets. in this paper, we refer to the headings set forth in rastin banking and its pillars of rastin pls banking. rastin banking is a new approach in the banking industry. keywords: rastin banking, rastin pls banking, islamic banking, interest-free banking introduction many economists around the world have done their best to eliminate riba from banking activities, but have not achieved much. in this direction, rastin banking, in compliance with sharia commands, has been compiled to not only eliminate riba but also to institutionalize various teachings of justice and islamic ethics in banking activities. good points of rastin banking in all fields of banking, financial, economic, ethical, social, and international activities are so expanded that it can be regarded as a base to improve banking structure. to preserve the achievements and technicalities of rastin banking, the draft of rastin banking bill1 and the operational bylaw of rastin banking2 were compiled. here we go touch just the heads of general topics of rastin banking and interested people can refer to the detailed texts of this method.3 principles to increase the compliance of banking system with principles and regulations of islamic religion, and better access to safe financial activity and helping the economy to bloom, fair distribution of possibilities and opportunities, job creation and increasing the welfare of the society, rastin banking system was designed and all banks can carry out their activities on this basis. rastin banking system is based on special operational, financial, economic, ethical, social, legal, international and organizational principles that based upon the latest scientific achievements of humankind in the field of science and technology with the aim of economic and banking growth and development of the society. a collection of rastin banking approaches is defined in rastin banking bill and operational bylaw of rastin banking. regulations of this banking system and all developments, improvements and designing its subsystems and new processes or concordance new subsystems with prevailing processes should be carried out by considering the content of the cited bill and bylaw. in addition, all future supplements and operational workflows should be designed in a way that not to contain fixed interest (riba) whether in cash or in other forms of future payment promises or by superficial contracts including the abstruse or disguised interest rate. rastin pls banking in rastin pls banking subsection, on behalf of the depositor, the bank finances entrepreneur for investment according to compiled regulations and at the end project, the entrepreneur will distribute the profit/loss of the project in proportion to capital and duration of using that capital with the depositor. the entrepreneur is responsible for all consequences of violating regulations of rastin pls banking. bank will have full supervision over the investment activity of the entrepreneur in the contract period. all documents of rastin pls banking are regarded as official documents. 1 bijan bidabad, azarang amir ostovar, saeed abdallahi, mahmoud allahyari fard, alexander pordel, maryam heidary, alireza shafiee, mohammad ali pourbehrouz, draft of rastin banking bill, bank melli iran, 2012. 2 bijan bidabad, azarang amir ostovar, saeed abdallahi, mahmoud allahyari fard, alexander pordel, maryam heidary, alireza shafiee, mohammad ali pourbehrouz, bylaw operational draft of rastin banking, bank melli iran, 2012. 3 to access detailed full-text documents of rastin banking see: http://www.bidabad.com mailto:bijan@bidabad.com http://www.bidabad.com/ copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 8 contracts, measures and legal institutions to facilitate legal activities of rastin banking, some improvements have been carried out on auxiliary islamic contracts, because today business conditions have been changed. for instance, in rastin banking mudarabah, both sides can provide some of the necessary funds. the same is true in muzaraah and musaqah contracts, and both sides of the contract can provide portions of fund, land and other factors of production. these are some corrections that rastin banking applied to civil law. new contracts also were defined in rastin banking in rastin banking bill as follows: intermediation (muvasatah): is a contract, which one of the parties provides the capital under the condition that the other party by considering considers discretion and interest of the first party transacts with the third party and receives a wage. in this contract, the capital owner is called "moqsit", the agent is called intermediate or "wasit", and the third person is called entrepreneur. installing contract (mughasatah): is a contract, which a person provides the total or a portion of the capital for economic activity and the other part will pay him back his share in the results of the activity by installments. in this case, the capital provider is called "moghsit" (installer), the agent is called "ghasit" (installment payer), and the result is called moghsatah (installed). mughasatah has three kinds: ordinary, rental, and sharing. the share of moghsit in rental mughasatah includes price and value of the substance, and in sharing mughasatah is the price of substance and value of the return of mughasatah activity. swap (mubadalah): is a contract in which one person (mobadil) (swapper) undertakes to give the ownership of a certain asset (badal)/(swapped) to the other party (motabadil)/(swappee/one who receives the swapped asset) for a defined period; and the other person also undertakes to give the ownership of the same amount (mobaddal)(re-swapped) to the first person (mobadil) for an equal period. planting (mugharasah): is a contract between the owner (s) of a land and the agent (s) who implant on the land and they share jointly (like muzaraah) the results whether it is timber, fruit, leaf, flower, pick, straw, haft, stem, nectar, bulb, root and etc. in order to fulfill the necessary legislative needs of bank sharing activities, joint investment funds, and facilitating social insurance activities, some new legal institutions are defined by rastin banking: fund with variable capital: is a kind of fund in which the capital of fund varies along time through entering or exiting new shareholders and by changing their capital shares, or duration of sharing in the fund. funds with varying capital have been defined in the laws of many countries, but in the laws of iran, a few mentions are available about these types of fund. these funds can facilitate the operations of mutual funds, credit unions, and bank sharing activities. pension fund: includes the funds for obligatory social security insurance with governmental personality and optional pension (saving thrift plans) with private or public legal personality. the pension fund, whether private or public, should operate under the high supervision of the social security board. in addition to observing the regulations concerning rastin personal security regulations, these funds are obliged to deposit their resources in rastin pls banks. measures to discerning riba: to distinguish profit from riba the following measures were defined: in forward deals, the price of the contracted subject should not depend on the duration period involved. the lender should share the profit and loss of the economic activity of borrower. exact profit rate should not be determined and prefixed. no profit should be charged for consumption financing. in transacting of foreign exchange, the price should not depend on the duration period of transaction, whether spot or forward. exchange of funds or assets should be equal to values and durations. values and durations of first and second exchanged assets can be different if multiplications of duration by value for both exchanges are equal. entrepreneur in rastin pls banking, the entrepreneur is the applicant of fund resources. he will be bound to do his execution activities in accordance with his project proposal, which is approved by the bank. therefore, his technical, financial and executive capabilities should be verified and should have the managerial capability in connection with the project and be able to absorb necessary experts and experienced or skilled labor and be able to provide some of the project expenses internally. it is necessary to review his previous financial performances through auditing reports and financial and tax clearance certificates. he should also be bound to his previous obligations and should not have outstanding or delayed debts to the banking network. for goodness and virtue of the applicant’s activities, he should submit collaterals and guarantees to the bank. the bank should refer to crs (collateral registration system) and other authorities to confirm that the offered collaterals are free and have not been mortgaged before. the information on the project proposal of the entrepreneur, after the approval of the assessment unit of the bank, is reliable against him. the entrepreneur is bound to be transparent and follow and comply all his activities with auditing standards of rastin banking, and he has to follow the procedures of dividing profits, wage payment, bonuses, wage increase, overtime payments, accumulated profit and capitalization as reported in the project proposal. these items will be fixed from the beginning to the end of the project execution, and cannot be changed. if the provided information, documents, statistics by the copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 9 entrepreneur are fabricated, tricky or made by fraudulently maneuvers and cause losses to depositors or bank, the bank can compensate the losses from the collaterals and guarantees. to safeguard the benefits of the depositor and continue the obligations of the entrepreneur to fulfill the contract, the bank deprives the entrepreneur from the right of terminating the contract. in rastin pls banking contracts, it is necessary to cite the stewardship of the bank. if entrepreneur does not want or cannot carry out his tasks for any reason such as stopover, bankruptcy, dissolution, death, failure, insanity and so on, and the project halts, bank itself, or by selecting new entrepreneur will continue the project, or compensate the legal claims of the contract through collaterals and guarantees of entrepreneur. on the other side, the entrepreneur is bound to provide insurance coverage for probable risks. the kind of insurance coverage, costs, benefits, and beneficent are due to rastin banking regulations. the entrepreneur is not allowed to transact, transfer or change the ownership or possession of the assets of the subject of the contract including the collaterals during contract term without informing the trustee unit of bank pls department. if he violates without informing the bank, and the operational activities of the project stop or are disrupted, the entrepreneur will be responsible for compensating the loss from the time of transaction or transference. to prevent such seizures, the trustee unit of pls department of the bank will conduct periodic and ad hoc supervisions and even bank is allowed to bound the entrepreneur to install monitoring devices like rfid4, camera, and gps5 to control replacement and movement of equipment. in addition, the entrepreneur is obliged to inform the trustee unit and obtain the permission of pls department of the bank for further finance from other financial institutes. the entrepreneur is not allowed to sell the assessed assets of his company during the contract. the entrepreneur is bound to provide periodic and ad hoc reports according to national accounting, and financial standards defined by auditing organization according to laws and regulations, commensurate to the volume of investment and applied technology, and submit to trustee unit. entrepreneur’s auditor is selected among the officially approved auditors by bank and entrepreneur is obliged to provide the necessary arrangements and document monitoring for the auditor during the contract. if the financial provision of the project is not sufficient, by request of the entrepreneur, the bank can review the subject and after confirmation of trustee unit, by issuing new rastin certificates, finance the extra resources needs of the project. depositor those depositors, who are willing to participate in economic projects of an entrepreneur, in the form of rastin pls banking, will receive rastin certificates. the owners of these certificates share the results of the project proportional to nominal price and participation period of the certificate. the bank is not allowed to consider any privilege or priority for some depositors, buyers or sellers of rastin certificates or discriminates among them. the entrepreneur is allowed as like as the other real or legal persons to buy rastin certificates of his own project or other projects from rastin certificate market. the depositor can negotiate his certificate before the end of the contract or transfer it to others at a market price. transaction and transfer of rastin certificates are carried out on the website of the bank or dealing companies and other financial and banking institutions connected to the bank website. all the transactions should be registered at the issuer bank website. the periodic or final settlement of the certificate will be carried out with the latest owner of the certificate according to the kind of certificate and the concerning regulations of rastin banking. assessment and supervision to safeguard the benefits of depositor (purchaser of rastin certificate); and obtaining confidence about the design, explanations, calculations and feasibility of the project from various economic, technical and financial views; and good performance of the entrepreneur, bank uses internal or external real persons or legal entities services who have necessary capabilities and equipment including hardware and software. assessment and supervision groups of trustee and assessment units of the bank consist of technical, engineering, financial and economic sections and conduct the assessment and supervision on the basis of activity type, project sophistication, and technicalities, the amount of investment, duration of project and etc. according to rastin banking regulations. the capabilities of entrepreneur are assessed by prevailing financial measures and criteria. thus, entrepreneurs are ranked according to their incapability risks. bank signs participation contract with that entrepreneur who has a lower risk. assessor examines the reality of the project proposal and gives his view about the capability of the entrepreneur and the feasibility of the project. the project proposal should have necessary economic, technical, and financial justifications and will be financed by the bank if it is approved by the assessment unit of the pls department of the bank. the trustee is responsible for supervision and monitoring of operational activities and expenditures of the allocated fund, account keeping and financial reports of the project. the settlement with the entrepreneur in each phase and at the end of the project is due to the final confirmation of trustee unit according to rastin banking regulations. 4 radio frequency identification (rfid). 5 global positioning system (gps). copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 10 if the actual timing of project implementation does not match with the approved proposal, the related losses and fines will be deducted from the profit of entrepreneur, or his collaterals and guarantees according to rastin banking regulations. bank receives two commissions for preliminary and detailed assessments of the project plan. these commissions will be included in acceptable costs of the project. if the project is rejected during the assessment process, assessments cost will not be returned to the entrepreneur. in addition, at each time of allocating fund to project, the bank receives a commission for supervision, trustee, financial engineering, examination, and other services, which will be included in acceptable costs of the project. at the end of the project, if it gains profit, the bank will receive a share of profit proportional to the contributed fund of the project as the bank’s income. rastin pls base system rastin pls base system refers to the main process and general regulations of rastin profit and loss sharing (pls) banking system. on request and on behalf of the depositor, the bank invests his fund in one of rastin pls products and instead, gives rastin certificate of the selected project to him and allocates his fund to the selected project of an entrepreneur; and supervises the implementation and execution of the project. in the end, after deducting its own commission, bank divides the profit/loss (if any) among engaged sides (depositors and entrepreneur). the bank is an agent of the depositor and is responsible for observing his rights (depositor). he must use all his expertise to reach this end. in rastin base pls system for finite projects, musharakah (participation) certificates, and for infinite projects pazireh (subscripted) certificates are used. these activities are done under rastin banking regulations. the fixed profit rate is eliminated in rastin pls banking, and the return rate is calculated according to the real return of capital in the real economy. most of the regulations of rastin pls base system are extended to its financial subsystems. to make the bank capable of reaching his goals in a proper way, this system has its own organization, structure, and working process. major topics in rastin pls base system consist of organizational, professional behavior of assessor and trustee, project proposal, assessment, guarantees, collaterals and entrepreneur cash contribution (brought), insurance, contract set-out, supervision, entrepreneur, financial transparency, information disclosure, governance, auditing, rastin participation accounting, change of project timing, settlement, bank receipts, transforming pazireh (subscripted) certificates into shares of entrepreneur company, inspection and commodity standard, auxiliary financial tools, unexpected accidents (force majeure) and arbitration. rastin certificates rastin certificates are a collection of designed certificates in rastin pls banking base system and its financial subsystems. these certificates can be anonymous or named papers, which are transferable and negotiable online through the website of the bank and are issued with a nominal price and for a certain period. the owners of these certificates share the results of the project proportional to nominal price and participation period of the certificate. bank by issuing and creating market and basket of rastin certificates provides various opportunities for the transaction of these papers. various rastin certificates and their characteristics according to the kind of participation in the pls base system or its financial subsystems regarding the type of project and the asset used will be bound to rastin banking regulations. regarding the supervisory role of trustee unit of banks over entrepreneurs, these certificates are distinguished from ordinary papers with “certificate” prefix. being anonymous, transferability, negotiability in the secondary virtual market (rastin certificate market), the profitability of their transactions for the bank, pricing according to supply and demand mechanism of rastin certificate market, a periodic settlement with the latest certificate owner, are some characteristics of these certificates. rastin financial subsystems rastin financial subsystems refer to specific financing methods or services in rastin pls banking. these subsystems work under general regulations of rastin pls base system, and are: joalah financial sharing (jfs): is a method in which, the bank finances entrepreneur (producer) from depositor's resources or the provided sources by the buyer; by selling future certificates (to depositor or buyer) and in the framework of another joalah contract, entrepreneur produces the buyer requested commodity. future certificate is used in jfs. mudarabah financial sharing (mfs): is a kind of mudarabah under rastin pls banking in which bank introduces the entrepreneur project proposal in the field of trade or transaction of commodities (commerce) to depositors and by selling them mudarabah certificates finances the entrepreneur (modarib). in mfs mudarabah and periodic mudarabah certificates are used. installment financial sharing (ifs): in ifs, the installer (moghsit or depositor) will finance a portion of the needed fund of the entrepreneur through the bank for a certain period of time (amortization period). the entrepreneur will pay back his share by installments and will own the total property of the project, and ifs ends. ifs can be carried out through one of the contracts of ordinary mughasatah (installment), rental mughasatah (installment) and musharakah (sharing) mughasatah (installment); and by application of three related kinds of certificates of ordinary mughasatah and rental mughasatah certificates for finite projects and musharakah mughasatah certificate for infinite projects. copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 11 rent financial sharing (rfs): entrepreneur temporarily donates the ownership of a part of his productive asset6, rental asset7 , or dead asset8 to the depositor who finances him but keeps it as a mortgage. then pays back the fund received from the yields of the asset proportional to depositor's share to depositor at the end of the contract, or periodically. the original deposit of depositor will be given back to him after the end of the project. the profit of the project will be given to depositor periodically or in a lump. mortgage sharing, periodic mortgage sharing, mortgage mudarabah (commerce), periodic mortgage mudarabah, mortgage muzaraah (cultivating), periodic muzaraah, mortgage mugharasah (planting), periodic mortgage mugharasah, mortgage musaghah (irrigation), periodic mortgage musaghah, mortgage istisna (industrial/manufacturing), periodic mortgage istisna and rental certificates are used in rfs. bail financial sharing (bfs): is the application of deposit of depositor by the entrepreneur to produce a defined commodity and delivering the commodity or paying back its value in a future specified time. bfs uses bail certificate. rastin group funding (rgf): is collecting deposits of specific depositors for a specific beneficial project under the regulations of rastin banking. in rgf, rastin certificate is not issued. rastin personal security (rps): to create competitive conditions and to increase the efficiency of social security insurance and diminishing antitrust of social security systems and pension funds, private and public pension funds are established according to rastin banking regulations. people and firms can allocate a portion of their obligatory (or optional) insurance premium payments (for himself or his employees) for social security to the funds that operate under rastin personal security (rps) and enjoy its benefits. therefore, they will be exempted from obligatory insurance premium payments equal to the payment they have paid to these funds. in addition, those employers who have obtained rastin personal security coverage for their employees will enjoy a 50 percent reduction in their obligatory social security payments. this also encourages them to increase employment. rps uses social security certificate, personal security certificate, and pension security certificates. rastin social takaful (rst): benevolent people can deposit their funds at banks for charity purposes, and the bank will be allowed to pay profit (or the principal as well) of deposit to needy people, in the form of a loan or non-returnable payments (according to the depositor request). rst works under rastin banking regulations as "public takaful" (humanistic duty of people to resolve others' needs), or "ziman-e-i'alih" (government duty to provide people's livelihood of the society). in addition, the bank can collect waqf (devoted) deposits to raise fund. waqf deposit is a kind of deposit devoted by the depositor (benefactor) to the bank, and the bank will use the yields of this deposit to support needy people in the framework of rastin banking regulations. those people, who need financial support and cannot afford their basic livelihoods are: needy people, poor, indigent, helpless, mentally or bodily sick, disabled or handicapped, insane, bedridden, elderly, vagrant, captive, deserted child, exiled, orphan, infant without parent, damaged, those who cannot afford blood money of unintentional faults, families with no guardians or poor guardians, and similar cases; and those who are eligible to receive fitriah, zakat, kaffarah, and charity payments. moreover, those people whom private (not governmental) benevolent depositor introduces to the bank to receive charity payments or loans, even be included or not included in the above list are considered as needy and should be supported through the specified benevolent deposit. ensuring minimum livelihood in forms of monthly or lump payment can be done through rastin social takaful insurances such as: housing insurance, marriage insurance, job insurance, education insurance, medical and medicare insurance, incident insurance, food insurance, clothing insurance, insurance for defending rights, orphan insurance, disabled insurance, guardianship insurance and relief insurance under rastin banking regulations. social security organization, charity institutions, and supportive organizations cannot conduct takaful activities directly, and they must do the job through bank to support people. bank will pay the needy according to the issued draft of benevolent. bank and governmental benevolent are obliged to release their supporting payments information on their website in such a way that would not harm the prestige of the supported people. the bank that acts under rst should provide its performance report according to central bank regulations. the central bank controls the performance of the bank in connection with rst activities and reports any violations to legal or disciplinary authorities. supervisory organizations and institutions, whether including general inspection organization of the country or general accounting authority, will have proper supervision on the proper execution of rastin social takaful. rastin social takaful is applicable by issuing takaful certificate and loan certificate. sponsor crowd funding (scf): is the process of collecting non-returnable funds for a specific protective goal of the entrepreneur through the bank via social networks. in scf, rastin certificate is not issued. peer to peer loan (ppl): is the process of collecting funds for loan-financing the entrepreneur through the bank and via social networks. in ppl, rastin certificate is not issued. 6 "productive assets" refers to the assets of an operating firm. 7 "rental assets" refers to those assets, which can be let. 8 "dead assets" refers to non-operating (suspended) firms or uncultivated lands assets. copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 12 rastin swap bond (rsb): is based upon mubadalah (swap) contract between mobadil (swapper) and motebadil (swappee) in which the duration and substances of swaps are equal for first and second swaps. motebadil (swappee) issues the bond and owes to mobadil equal to the nominal value of the bond; should pay this amount (badal) to mobadil (swapper) at maturity. the issuer (motebadil) is obliged to give the mobaadal for the same amount and period as badal to mobadil. he can choose a combination of amount and period that the multiplication of amount by the period of mobaddal be equal to that of badal. at second maturity, mobadil is committed to returning mobaddal to motebadil. no interest rate is involved in these bonds, and they are of four kinds: central bank rastin swap bond, treasury rastin swap bond, bank rastin swap bond, and commercial rastin swap bond. they can be in domestic money or foreign exchange. regarding the fact that these bonds are not based upon participation and just indicate swapping of assets, is not covered by regulations of the rastin pls base system, but uses its infrastructure such as organization and rastin certificate market. rastin swap deposit (rsd): is a new banking deposit account, which is interest-free and is based on swap contract in rastin banking. in this depositing by opening the deposit, the depositor is entitled to use the interest-free loan to the amount and duration that his resources have been being deposited and then return the money back to the bank. depositor and bank agree that a combination of money and duration be selected in such a way that the products of amount and duration in both operations of depositing and loaning be the same. from the time of depositing to the first maturity (the date that depositor requests loan), the depositor is lender, and the bank is borrower; and from the time of the first maturity to second maturity (the date that depositor returns the money back to the bank) the depositor is borrower, and the bank is lender. rastin swap card (rsc): is a bank card, and has no interest rate and is issued based on the swap contract in rastin banking. in rastin swap card there are two periods. in the first-period card, issuer lends money to the cardholder, and in the second period borrows money from card holder instead. at the first stage card issuer credits a certain amount of money for specific time duration to the card of cardholder and requests the cardholder to deposit the same amount for the same period at the end of the cited time duration (first maturity) in the issuer's deposit account. card issuer and cardholder can agree for a combination of amount and duration for which the product of them (amount by duration) be equal for both operations of lending money by the issuer and depositing by the cardholder. rastin swap card can be issued in both local and foreign currencies. bank receives a fee by offering rastin swap card service. complementary systems rastin banking complementary systems refer to innovations, systems and complement methods in rastin banking system; and are as follow: rastin certificate market (rcm): bank establishes rcm with specific characteristics and capabilities. different rastin certificates and rastin swap bonds can be transacted in this market. bank activates the information portal about projects and entrepreneurs of rastin pls bank through rcm and releases information about rastin pls financial projects to the public. the system should be capable of online updating the information about available certificates, transactions, settlements, capitalization, transfer, or any other activity on rastin certificates transactions. crowd funding system (cfs): this system is a web-based system, which collects funds for sponsor crowd funding (scf) and peer to peer loan (ppl) projects via social networks. operation control and monitor (ocm): this system is a web-based inspection and monitoring system, which controls the activities of bank personnel. by establishes this system, the bank has online control over the personnel activities to be in accordance with operational instructions of rastin banking system. online unnoticeable monitoring of all activities of bank units, clients and personnel of different departments and branches, incompatibility of accounts and documents, embezzlement, cheating, and fraud detection and etc. with varying levels of accessibility, reporting and analysis routines, data mining, distinguishing and follow up systems for cyber-attacks and establishment of internal control are the tasks of this system. collateral registration system (crs): department of registry of documents and properties establishes the integrated collateral registration system (crs) for registering movable and immovable collaterals and introduces it to notary offices. banks, notary offices and other related authorities (determined by department of registry of documents and properties) at the time of mortgaging collaterals or restraining properties should register all mortgage information in this system. this system is integrated, and each asset has a unique identification number. therefore, it can easily show whether an asset has been collateralized or restrained before or not. department of registry of documents and properties provides this capability for banks and other organizations and real persons and legal entities to find out online whether an asset has been collateralized or restrained before or not. on the other hand, in order to provide a safer environment for conducting collaterals auction and sale and enforcing the subjects of enforceable documents, department of registry of documents and properties establishes a website for auction with relational database management system, auction and sale capabilities and dynamically connected to crs. serial commitments clearance (scc): provides the necessary arrangements for settlement of obligations of people who are in debt to someone from one hand, while they are creditors to someone else in a chain of debits and credits in a set of people. accordingly, banks, notary offices, and other authorized authorities can clear serial obligations of persons according to laws and copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 13 regulations and based on their requests and release their collaterals and guarantees as far as their debts are equivalent. bank will gain a commission for rendering this service. mortgage securitization system (mss): by assessing the value of the asset, the bank can issue guarantee certificate in different lots and periods for the owner of the asset. the holder of this certificate can apply to banks and other institutions or real persons and legal entities (who accept these certificates as guaranty) for themselves or on behalf of other people. obtaining these certificates can be through ordinary or official contracts. the issuer bank by using interbank withdrawal protocol (iwp) can gain his claims from the accounts of the indebted after restraining the guarantee certificate. if the issuer bank becomes bankrupt, the beneficiary of guarantee certificate can obtain his nominal claim from settlement manager. interbank withdrawal protocol (iwp): allows bank to obtain his claim created through binding contracts or commercial documents (check, promissory note, and draft) from other accounts of the debtor at other banks, or accounts belonging to his guarantors at other banks in an online way, after the debtor’s first bank account is depleted. this activity takes place under central bank supervision. the bank is not allowed to use iwp in relation to ministries and other governmental organizations accounts that have a row in government budget bill. however, the bank is allowed to use iwp in relation to the accounts of governmental companies and other affiliated organizations and institutes to government, and non-governmental public institutions that do not use a public budget, including pension and social security organizations, revolutionary foundations and organizations and holy shrines. to implement this protocol, the central bank provides necessary legal and electronic obligations to all banks, financial and credit institutes. based on claimer request, the iwp software will carry on account of the creditor if any money is carried into account of the debtor automatically at the same time. therefore, every bank client should have a unique identification number in the banking system; in addition, all commercial documents should have a unique identity number. according to this protocol, the bank provides the necessary conditions for receiving outstanding and delayed debts, doubtful debts, unpaid debts of his own claims and his client's claims that initiated through a loan, check, promissory notes, drafts, that had been initiated in the traditional system before. non-usury scripless security settlement system (nssss): central bank establishes the integrated usury-free scripless security settlement system with specific characteristics and capabilities and activates the registration portal for entrepreneurs of rastin pls banking. compliance with sharia is the necessary condition for the entrance of financial documents and instruments in this portal. portals of rastin certificate markets (rcm) of banks are to be designed in accordance with the central bank’s standards, so that the information concerning financing projects through rastin pls banking, entrepreneurs and rastin certificates will be updated online in nssss system. this system should be capable of online updating of information concerning rastin certificates and rastin swap bonds of bank’s portal for each transaction, settlement, capitalization or any other kinds of transaction and transition of rastin certificates and bond by registering them in the system. money laundering detection system (mld): all commercial and financial transactions, whether with the aim of gaining profit or not, are regarded as economic transaction and are included in the value added tax system. in addition, there should be a spot or delayed payment for each transaction of commodity or service. the two information of each transaction, that is a transaction of a commodity (or service) and its payment, should be matching; otherwise, there will be suspicion of money laundering. the mld system will provide structural and electronic conditions for comparing and matching banking and tax information. if necessary conditions be forced that underground economy parties be obliged to use banking system; and tax authorities do special supervision on large and medium transactions and transition of commodities, money-laundering activities can be detected and traced through matching tax information and banking information. to do so, all the banks and credit associations become obliged to report money transactions data of persons to anti money laundering organization at the ministry of finance and economic affairs to be compared with value added tax data (individuals’ sales factors). the cited organization performs mechanized data mining by computer software based on information and communications technology to discover the suspicion of money laundering. preventing squandering of banking resources to prevent squandering and to reform banking sources consumptions, which have worse economic and social consequences than riba, and to increase efficiency, the bank is obliged to follow specific regulations concerning his activities. to decrease operational costs and to increase efficiency, and facilitate rendering banking services to clients; banks should mechanize their operational systems and by re-engineering their operational processes, make them more economical and safer and by gradual diminishing of the number of their physical branches, prevent the useless branch accumulation. moreover, by interbank transactions and transfer of their surplus personnel to complementary banking services such as assessor, supervisor (trustee), intermediate, dealer, investment adviser, market operator, publisher, transactor, financial basket operator, financing company, investment fund, rating agency, financial information processing, credit rating institute, financial it services institute etc., after training them; provide convenient conditions for financial services activities. copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 14 banks will be obliged to finance only projects, which have observed the following considerations and criteria in their project proposal. decreased costs of investment, production, consumption, and distribution. increased efficiency with the lowest amount of damages, wastes, defected, and low standard products. the useful production life of the investment and durable and semi-durable productions, constructions, skeletons, installations, and machinery should be long enough. road and transportation projects should be designed in such a way to stay for a long period. considerations should be observed about the optimum use of energy and fuel in constructions, installations, and machinery. cultivating soil erosion should be prevented. decreases the mortality and extends the life of human being. creates clean production and prevents environmental pollution and lead to sustainable production by creating ecological production loops. prevent incorrect mine extraction. encountering natural incidents in the project proposal to preserve the invested capital and prevents rapid or gradual product deterioration or erosion because of temperature, natural and atmospheric incidents such as humidity and acidity climates. unique standards should be used in joints, machinery, systems, parts, and various mechanical apparatuses. prevent waste of resources due to non-optimal resource combination. restoring uncultivated lands by observing financing regulations, the bank can finance projects of restoring uncultivated lands. the government can provide its own uncultivated lands to the applicants of projects for restoring uncultivated lands, and if these lands are restored, the government will transfer the restored land to restorer agent; or shares it between restorer and bank if it were financed by the bank according to regulations. lands authorities are obliged to support qualified applicants for the promotion of employment and development of agriculture, industry, mining, housing and tourism in the development of different regions of the country. transparency, information disclosure and governance in bank bank and parties involved in rastin banking contracts should observe the supervisory regulations of central bank and stock exchange organization concerning financial transparency, information disclosure, and corporate governance. carrying out the subject of enforceable documents in implementing the rastin banking system, all contracts with the bank are considered as official documents and enforceable. these contracts will be carried out by the unit of execution of enforceable documents in the bank, through the personnel of this unit. if the debtor would not fulfill his commitment, after assessing the subject of the contract, the collateral will be sold through an auction, and after paying back the debt, the surplus will be paid to the owner of the mortgage. the organization, management, supervision, and implementation of execution of enforceable documents will be according to banking regulations concerning execution of bank's enforceable documents and method of investigation of complain of execution process in rastin banking regulations. safeguarding of rastin banking regarding the importance of rastin banking system achievements, it is necessary to establish a committee composed of experienced experts in this field as “safeguarding rastin banking committee” for five years under the supervision of central bank for the virtue of the implication, training, development and solving the probable deficiencies and obstacles of rastin banking system. the organization and activities of this committee have been specified and compiled in rastin banking regulations. the ministry of science, technology, and research will also define rastin banking and related financial services courses and degrees for universities such as financial marketing, assessing, supervision, intermediation, and consultancy with observing the concepts and regulations of rastin banking system and its future reforms and developments. in order to safeguard rastin banking system and the rights of depositors and entrepreneurs and all those who trust the bank, all banking personnel, from top to bottom, at managerial and execution levels should precisely implement the regulations of rastin banking system and abstain any violation; otherwise, the wrongdoer will be encountered legally. various violations and punishments and the method of investigation of violations of the employees have been defined in rastin banking regulations. documents and regulations all rastin banking documents are accessible in full-text.9 there are more than fifty ongoing complementary projects to develop rastin banking. the following legal documents have been compiled for rastin banking until this time: draft of rastin banking bill draft of operational bylaw of rastin banking draft of operational bylaw of financial transparency, governance, and banking information disclosure in rastin banking. 9 http://www.bidabad.com http://www.bidabad.com/ copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 15 draft of bylaw of execution of bank's enforceable documents and method of investigation of complain of execution process in rastin banking. conclusion removal of riba from banking operations has been one of the aspirations of religious scholars during history. to achieve this goal, we tried to mix our theoretical and experimental knowledge to develop rastin banking. rastin banking is a complete solution to banking based on islamic and ethical teachings with a scientific and technological approach. some parts and modules of rastin banking have been implemented in bank melli iran. the installed parts of the system are now functioning and have attracted depositors and investors, and since the procedures and instructions are well defined, the bank's staff is performing its procedures easily. the results of the test system are very satisfactory, but it needs more time for more analysis of the weak and strong points of the system. rastin banking is an open-source banking model, and all banks around the globe can easily install and use it. we wish rastin banking can put important steps to remove riba and establish islamic banking. resources of rastin banking the persian and english documents of rastin banking all are accessible through http://www.bidabad.com in full texts. persian documents persian books and detailed reports المی بیژن بیدآباد، مبانی عرفانی اقتصاد اسالمی، پول، بانک، بیمه و مالیه از دیدگاه حکمت. پژوهشکدة پولی و بانکی، بانک مرکزی جمهوری اس .1383ایران، http://www.bidabad.com/doc/mabani-erfani-eqtesade-islami.pdf بري، بیژن بیژن بیدآباد، ژینا آقابیگي، مهستي نعیمي، آذرنگ امیراستوار، سعید صالحیان، سعید نفیسي زیده سرایي، علیرضا مهدیزاده چله پور، نادیا خلیلي والئي. طرح تفصیلي بانكداري مشاركت در سود و زیان پور، سعید شیخاني، محمود الهیاري فرد، محمد صفایي حسین (pls)راستین .1387ریزي، بانك ملي ایران، ، اداره تحقیقات و برنامه http://www.bidabad.com/doc/detailed-pls.pdf داودي، زاده، علي حیات ، علیرضا مهديبیژن بیدآباد، ژینا آقابیگي، آذرنگ امیراستوار، ابوالفضل هزاوه، علیرضا شفیعي، سعید نفیسي زبده سرائي اله زاده، پور، علي كوثري، باقر عین پور، سید علي حسیني، اكبر شالي، محمد كاشفي، محمود الهیاري فرد، محمد صفایي بیژن حسین (mfs)مهستي نعیمي، نادیا خلیلي والئي، شاكري. طرح تفصیلي مشاركت مالي مضاربه ر سود و ، زیرسیستم بانكداري مشاركت د (pls)زیان راستین . 1389، بانك ملي ایران، تهران http://www.bidabad.com/doc/detailed-mfs.pdf داودي، بیژن زاده، علي حیات ديبیژن بیدآباد، آذرنگ امیراستوار، ابوالفضل هزاوه، علیرضا شفیعي، سعید نفیسي زبده سرائي، علیرضا مه اله زاده، مجید پور، علي كوثري، باقر عین پور، سیدعلي حسیني، اكبر شالي، محمد كاشفي، محمود الهیاري فرد، محمد صفایي حسین (jfs)ناصري، مهستي نعیمي، نادیا خلیلي والئي، شاكري. طرح تفصیلي مشاركت مالي جعاله سود و ، زیرسیستم بانكداري مشاركت در (pls)زیان راستین .1389، بانك ملي ایران، تهران http://www.bidabad.com/doc/detailed-jfs.pdf شمس، شهرام اکبرزاده. طرح بیژن بیدآباد، امیر عباس سیاهپوش، مهتاب میرزایی قاضی، سمیه الجبوری، زینب غالمي، امیر شریفی، امیر . 1389الحسنه مهر ایران، انداز، بانك قرض الحسنه پس تفصیلي گواهي قرض http://www.bidabad.com/doc/gavahi-qarz-tarh-bi-vam.pdf http://www.bidabad.com/doc/gavahi-qarz-tarh.ppt ي بیژن بیدآباد، امیرعباس سیاهپوش، مهتاب میرزایی قاضی، سمیه الجبوری، زینب غالمي، امیر شریفی، امیر شمس، شهرام اکبرزاده. طرح تفصیل .1390الحسنه مهر ایران، بانك قرضانداز با گواهي امتیاز حق وام، الحسنه پس گواهي قرض http://www.bidabad.com/doc/gavahi-qarz-tarh-ba-vam.pdf (ifs)بیژن بیدآباد، طرح تفصیلي مشاركت مالي مقاسطه ن ، زیرسیستم بانكداري مشاركت در سود و زیان راستی (pls) اداره تحقیقات و . .1390ریزی، بانك ملي ایران، تهران برنامه http://www.bidabad.com/doc/detailed-ifs.pdf (rfs)بیژن بیدآباد، طرح تفصیلي مشاركت مالي اجاره زیان راستین ، زیرسیستم بانكداري مشاركت در سود و (pls) اداره تحقیقات و . .1390ریزی، بانك ملي ایران، تهران برنامه http://www.bidabad.com/doc/detailed-rfs.pdf ، بانك ملي ایران، تهران (pls)، زیرسیستم بانكداري مشاركت در سود و زیان راستین (rst)بیژن بیدآباد. طرح تفصیلي تکافل اجتماعی راستین 1391 . http://www.bidabad.com/doc/detailed-rst.pdf (bfs)بیژن بیدآباد. طرح تفصیلي تأمین مالی امانی مشاركت در سود و زیان راستین ، زیرسیستم بانكداري (pls) . 1391، بانك ملي ایران، تهران http://www.bidabad.com/doc/detailed-bfs.pdf (rps)بیژن بیدآباد. طرح تفصیلی تأمین شخصی راستین یان راستین ، زیرسیستم بانكداري مشاركت در سود و ز (pls) بانك ملي ایران، تهران ، 1391. http://www.bidabad.com/doc/detailed-rps.pdf http://www.bidabad.com/ http://www.bidabad.com/doc/mabani-erfani-eqtesade-islami.pdf http://www.bidabad.com/doc/detailed-pls.pdf http://www.bidabad.com/doc/detailed-mfs.pdf http://www.bidabad.com/doc/detailed-jfs.pdf http://www.bidabad.com/doc/gavahi-qarz-tarh-bi-vam.pdf http://www.bidabad.com/doc/gavahi-qarz-tarh.ppt http://www.bidabad.com/doc/gavahi-qarz-tarh-ba-vam.pdf http://www.bidabad.com/doc/detailed-ifs.pdf http://www.bidabad.com/doc/detailed-rfs.pdf http://www.bidabad.com/doc/detailed-rst.pdf http://www.bidabad.com/doc/detailed-bfs.pdf http://www.bidabad.com/doc/detailed-rps.pdf copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 16 محمدعلی پوربهروز، فرد، اسکندر پردل، مریم حیدری، علیرضا شفیعی، بیژن بیدآباد، آذرنگ امیراستوار، سعید عبداللهی، محمود الهیاری 1391پیشنویس الیحه قانونی بانکداری راستین، بانک ملی ایران، . http://www.bidabad.com/doc/rastin-banking-bill.pdf فرد، اسکندر پردل، مریم حیدری، علیرضا شفیعی، محمدعلی پوربهروز، ریبیژن بیدآباد، آذرنگ امیراستوار، سعید عبداللهی، محمود الهیا 1391نامه اجرایی بانکداری راستین، بانک ملی ایران، پیشنویس آئین . http://www.bidabad.com/doc/rastin-banking-regulation.pdf mldبیژن بیدآباد، طرح تفصیلی سیستم کشف پولشویی ) ریزی، بانک ملی ایران. (، سیستم مکمل بانکداری راستین. اداره تحقیقات و برنامه 1391. http://www.bidabad.com/doc/detailed-mld.pdf پور، معصومه خالصیان طرح تفصیلی تأمین مالی فرد، اسکندر پردل، سعید عبداللهی، شهرام مهرپویا، علی حسینی محمود الهیاریبیژن بیدآباد، rcfجمعی راستین ) .1393ریزی و مدیریت ریسک، بانک ملی ایران. (. اداره کل تحقیقات، برنامه http://www.bidabad.com/doc/detailed-rcf.pdf پور، معصومه خالصیان طرح تفصیلی تأمین مالی فرد، اسکندر پردل، سعید عبداللهی، شهرام مهرپویا، علی حسینی بیژن بیدآباد، محمود الهیاری rgfگروهی راستین ) .1393یران. ریزی و مدیریت ریسک، بانک ملی ا (. اداره کل تحقیقات، برنامه http://www.bidabad.com/doc/detailed-rgf.pdf .1394بیژن بیدآباد، بانکداری راستین، جلد اول: مباحث نظری. مؤسسه نوین پژوهان، http://www.bidabad.com/doc/rastin-bank-1-fa.pdf http://pub.npdr.ir/product/%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c%d8%b1%d8%a7%d8%b3%d8%aa%db%8c%d9%86-%d8%ac%d9%84%d8%af-1/ .1394بیژن بیدآباد، بانکداری راستین، جلد دوم: مباحث کاربردی. مؤسسه نوین پژوهان، http://www.bidabad.com/doc/rastin-bank-2-fa.pdf http://pub.npdr.ir/product/%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c%d8%b1%d8%a7%d8%b3%d8%aa%db%8c%d9%86-%d8%ac%d9%84%d8%af-2%d8%b3%db%8c%d8%b3%d8%aa%d9%85-%d9%86%d9%88%db%8c%d9%86%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7/ .1394مباحث اجرایی. مؤسسه نوین پژوهان، بیژن بیدآباد، بانکداری راستین، جلد سوم: http://www.bidabad.com/doc/rastin-bank-3-fa.pdf http://pub.npdr.ir/product/%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c%d8%b1%d8%a7%d8%b3%d8%aa%db%8c%d9%86%d8%b3%db%8c%d8%b3%d8%aa%d9%85-%d9%86%d9%88%db%8c%d9%86%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c-%d8%a7-2/ persian papers اقتصادي ربا در وام -بیژن بیدآباد، عبدالرضا هرسیني، تحلیل فقهي گذاري و كاستي های مصرفي و سرمایه های فقه متداول در كشف احكام شارع. . چاپ مجدد در مجله بانک و اقتصاد 1382ارائه شده به همایش دوساالنه اقتصاد اسالمي، پژوهشكدة اقتصاد، دانشگاه تربیت مدرس، ؛ 34-38، صفحات: 1389: شهریور 109؛ 36-41، صفحات: 1389: مرداد 108؛ 38-42، صفحات: 1389: خرداد 106های: شماره .42-44، صفحات: 1389آذر :112؛ 34-38، صفحات: 1389: آبان 111 http://www.bidabad.com/doc/reba-fa.pdf ن بیژن بیدآباد، عبدالرضا هرسیني، شركت سهامي بانك غیرربوي و بازبیني ماهیت ربوي و غیرربوي عملیات بانكي متداول. مجموعه مقاالت سومی ، پژوهشكدة اقتصاد، دانشگاه تربیت 1382دي 3-4، «نظریة اقتصاد اسالمي و عملكرد اقتصاد ایران»وساالنة اقتصاد اسالمي همایش د ، تهران.193-224مدرس، صفحات http://www.bidabad.com/doc/sherkat-sahami-bank.pdf http://www.bidabad.com/doc/sherkatbank.ppt های شیوة حکومت اسالمی. مجموعه مقاالت هشتمین همایش دوساالنه اقتصاد اسالمی: اقتصادی انواع بیمه و ویژگی -بیژن بیدآباد، تحلیل فقهی ، تهران.1393اردیبهشت 17و اقتصاد ایران، دانشگاه تربیت مدرس، پژوهشکده اقتصاد، اخالق در اقتصاد اسالمی http://www.bidabad.com/doc/bimeh.pdf http://www.bidabad.com/doc/bimeh.pptx .1389های تأمینی، بیژن بیدآباد، تحلیل فقهی ـ اقتصادی بیمه http://www.bidabad.com/doc/bimeh-tamini.pdf . 1389بیژن بیدآباد، بیمه و نظریة زنجیرة ورشکستگی، http://www.bidabad.com/doc/bimeh-varshekastegi.pdf .1389بیژن بیدآباد، تحلیل فقهی ـ اقتصادی بیمه اجباری، http://www.bidabad.com/doc/bimeh-ejbari.pdf http://www.bidabad.com/doc/rastin-banking-bill.pdf http://www.bidabad.com/doc/rastin-banking-regulation.pdf http://www.bidabad.com/doc/detailed-mld.pdf http://www.bidabad.com/doc/detailed-rcf.pdf http://www.bidabad.com/doc/detailed-rgf.pdf http://www.bidabad.com/doc/rastin-bank-1-fa.pdf http://pub.npdr.ir/product/%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c-%d8%b1%d8%a7%d8%b3%d8%aa%db%8c%d9%86-%d8%ac%d9%84%d8%af-1/ http://pub.npdr.ir/product/%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c-%d8%b1%d8%a7%d8%b3%d8%aa%db%8c%d9%86-%d8%ac%d9%84%d8%af-1/ http://www.bidabad.com/doc/rastin-bank-2-fa.pdf http://pub.npdr.ir/product/%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c-%d8%b1%d8%a7%d8%b3%d8%aa%db%8c%d9%86-%d8%ac%d9%84%d8%af-2-%d8%b3%db%8c%d8%b3%d8%aa%d9%85-%d9%86%d9%88%db%8c%d9%86-%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7/ http://pub.npdr.ir/product/%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c-%d8%b1%d8%a7%d8%b3%d8%aa%db%8c%d9%86-%d8%ac%d9%84%d8%af-2-%d8%b3%db%8c%d8%b3%d8%aa%d9%85-%d9%86%d9%88%db%8c%d9%86-%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7/ http://pub.npdr.ir/product/%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c-%d8%b1%d8%a7%d8%b3%d8%aa%db%8c%d9%86-%d8%ac%d9%84%d8%af-2-%d8%b3%db%8c%d8%b3%d8%aa%d9%85-%d9%86%d9%88%db%8c%d9%86-%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7/ http://pub.npdr.ir/product/%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c-%d8%b1%d8%a7%d8%b3%d8%aa%db%8c%d9%86-%d8%ac%d9%84%d8%af-2-%d8%b3%db%8c%d8%b3%d8%aa%d9%85-%d9%86%d9%88%db%8c%d9%86-%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7/ http://www.bidabad.com/doc/rastin-bank-3-fa.pdf http://pub.npdr.ir/product/%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c-%d8%b1%d8%a7%d8%b3%d8%aa%db%8c%d9%86-%d8%b3%db%8c%d8%b3%d8%aa%d9%85-%d9%86%d9%88%db%8c%d9%86-%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c-%d8%a7-2/ http://pub.npdr.ir/product/%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c-%d8%b1%d8%a7%d8%b3%d8%aa%db%8c%d9%86-%d8%b3%db%8c%d8%b3%d8%aa%d9%85-%d9%86%d9%88%db%8c%d9%86-%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c-%d8%a7-2/ http://pub.npdr.ir/product/%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c-%d8%b1%d8%a7%d8%b3%d8%aa%db%8c%d9%86-%d8%b3%db%8c%d8%b3%d8%aa%d9%85-%d9%86%d9%88%db%8c%d9%86-%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c-%d8%a7-2/ http://pub.npdr.ir/product/%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c-%d8%b1%d8%a7%d8%b3%d8%aa%db%8c%d9%86-%d8%b3%db%8c%d8%b3%d8%aa%d9%85-%d9%86%d9%88%db%8c%d9%86-%d8%a8%d8%a7%d9%86%da%a9%d8%af%d8%a7%d8%b1%db%8c-%d8%a7-2/ http://www.bidabad.com/doc/reba-fa.pdf http://www.bidabad.com/doc/sherkat-sahami-bank.pdf http://www.bidabad.com/doc/sherkatbank.ppt http://www.bidabad.com/doc/bimeh.pdf http://www.bidabad.com/doc/bimeh.pptx http://www.bidabad.com/doc/bimeh-tamini.pdf http://www.bidabad.com/doc/bimeh-varshekastegi.pdf http://www.bidabad.com/doc/bimeh-ejbari.pdf copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 17 ( )بانكداري اسالمي(. فصلنامة plsمحمود الهیاري فرد، فناوري اطالعات و ارتباطات در تحقق سازوكار مشاركت در سود و زیان ) بیژن بیدآباد، ت . چاپ مجدد در مجموعه مقاال1-37، صفحات 1384پژوهشي اقتصاد و تجارت نوین، سال اول، شمارة سوم، زمستان -علمي ، تهران.1392بهمن 8-9کنفرانس ملی توسعه مدیریت پولی و بانکی، بانک انصار، http://prd.moc.gov.ir/jnec/farsi/3rd/article2.pdf http://www.bidabad.com/doc/pls_it-fa.pdf almمحمود الهیاري فرد، كارایی نسبي مدیریت دارایی و بدهي ) بیژن بیدآباد، پژوهشي اقتصاد و تجارت -( در بانكداري اسالمي. فصلنامة علمي .109-128، صفحات 1387نوین، سال سوم، شمارة دوازدهم، بهار http://www.bidabad.com/doc/alm-farsi.pdf (، معرفي ابزارهای مالي گواهي مشاركت و گواهي plsمحمود الهیاري فرد، سازوكار عملیاتي بانكداري مشاركت در سود و زیان ) بیژن بیدآباد، ، بانك توسعه صادرات ایران، تهران، 1387مهر 27و صادرات، المللي. ارائه شده در دومین همایش خدمات بانكي پذیره با كارایی بین ، تهران. 1392بهمن 8-9ایران. چاپ مجدد در مجموعه مقاالت کنفرانس ملی توسعه مدیریت پولی و بانکی، بانک انصار، http://www.bidabad.com/doc/pls-banking.pdf http://www.bidabad.com/doc/pls-banking-export-deveopment-bank-2.ppt http://www.bidabad.com/doc/pls-banking-revised.pdf http://www.bidabad.com/doc/rastin-banking-4-revised.pptx http://www.bidabad.com/doc/pls-tamine-mali.ppt http://www.bidabad.com/doc/pls-3.ppt http://www.bidabad.com/doc/pls-mfs-jfs-instructions-93.pptx http://www.bidabad.com/doc/pls-novin-pajoohan.ppt http://www.bidabad.com/doc/pls-8-12-saat.ppt http://www.bidabad.com/doc/pls-banking.pdf http://www.bidabad.com/doc/pls-banking-export-deveopment-bank-2.ppt . (pls)محمد صفائي پور، چارچوب بازار الكترونیكي معامالت گواهي مشاركت/پذیره در قالب طرح مشاركت در سود و زیان بیژن بیدآباد، ، وزارت بازرگاني، تهران.1387آذر 3-4پنجمین همایش تجارت الكترونیكي، http://www.bidabad.com/doc/charchoobe-bazare-electronic-pls.pdf http://www.ecommerce.gov.ir/earchive/earchivef/item.asp?parentid=43&itemid=182 ن بیدآباد،بیژ بانكداري بدون ربا در برابر بحران .22-27، صفحات 103، شماره 1388های اقتصادي. مجله بانك و اقتصاد، آذر . مجموعه مقاالت کنفرانس ملی توسعه مدیریت پولی و بانکی، بانک (pls)محمود الهیاري فرد، حسابداري مشاركت در سود و زیان بیژن بیدآباد، ، تهران.1392بهمن 8-9انصار، http://www.bidabad.com/doc/pls-accounting-fa.pdf ی ها بیژن بیدآباد، تثبیت ادوار تجاری با بانکداری مشارکت در سود و زیان راستین و اقتصاد اخالق. مجموعه مقاالت همایش بررسی ابعاد و روش ، وزارت امور اقتصادی و دارایی، دانشگاه 134-167تأمین مالی در کشور با تأکید بر نقش بانک، بیمه و بازارهای سرمایه، صفحات ، 7، دوره 1392. چاپ شده در مجله اقتصاد مالي و توسعه )علوم اقتصادي(، پاییز 1390تیر 28پیام نور و بانک ملی ایران، تهران، .37-72، صفحات 24شماره http://fa.journals.sid.ir/viewpaper.aspx?id=252008 http://www.bidabad.com/doc/pls-business-cycles.pdf http://www.bidabad.com/doc/pls-business-cycles.ppt المللي توسعه نظام تأمین محمود الهیاري فرد، تأمین مالي غیرربوي مبتني بر فناوري اطالعات. مجموعه مقاالت سومین كنفرانس بین بیژن بیدآباد، گذاري مركز مطالعات تكنولوژي دانشگاه صنعتي شریف، ، گروه مدیریت مالي و سرمایه1389اسفند 1بهمن لغایت 30مالي در ایران. ، تهران.1392بهمن 8-9. چاپ مجدد مجموعه مقاالت کنفرانس ملی توسعه مدیریت پولی و بانکی، بانک انصار،69-89صفحات http://www.bidabad.com/doc/non-usury-finance-it-fa.pdf محمود الهیاري فرد، اوراق قرضه غیرربوي )ریالي و ارزي( و ابزارهای پولي بانكداري مركزي بدون ربا، مجموعه مقاالت سومین بیژن بیدآباد، گذاري مركز ، گروه مدیریت مالي و سرمایه1389اسفند 1بهمن لغایت 30ن. المللي توسعه نظام تأمین مالي در ایرا كنفرانس بین .517-540مطالعات تكنولوژي دانشگاه صنعتي شریف، صفحات http://www.bidabad.com/doc/islamic-banking-bond-fa.pdf دآباد، نگاهي بر بانكداري مشاركت در سود و زیان )بیژن بی pls های مشاركت مالي مضاربه ) ( و زیرسیستم mfs( و مشاركت مالي جعاله )jfs .) .20-26، صفحات 114، شماره 1390مجله بانك و اقتصاد، مرداد http://www.bidabad.com/doc/negahi-bar-pls-mfs-jfs.pdf داری بیژن بیدآباد، بررسي فقهی و حقوقي اوراق قرضه بدون ربا، مجموعه مقاالت همایش ملی بانکداری اسالمی در تأمین مالی )با تأکید بر بانک تهران.الحسنه مهر ایران و دانشگاه تربیت مدرس، ، بانک قرض1390آذر 22اسالمی(، http://www.bidabad.com/doc/legal-analysis-of-non-usury-bonds.pdf http://www.bidabad.com/doc/legal-analysis-of-non-usury-bonds.ppt انداز الحسنه پس بیژن بیدآباد، گواهي قرض (sqc) ،)مجموعه مقاالت همایش ملی بانکداری اسالمی در تأمین مالی )با تأکید بر بانکداری اسالمی ، رس، تهران.الحسنه مهر ایران و دانشگاه تربیت مد ، بانک قرض1390آذر 22 http://prd.moc.gov.ir/jnec/farsi/3rd/article2.pdf http://www.bidabad.com/doc/pls_it-fa.pdf http://www.bidabad.com/doc/alm-farsi.pdf http://www.bidabad.com/doc/pls-banking.pdf http://www.bidabad.com/doc/pls-banking-export-deveopment-bank-2.ppt http://www.bidabad.com/doc/pls-banking-revised.pdf http://www.bidabad.com/doc/rastin-banking-4-revised.pptx http://www.bidabad.com/doc/pls-tamine-mali.ppt http://www.bidabad.com/doc/pls-3.ppt http://www.bidabad.com/doc/pls-mfs-jfs-instructions-93.pptx http://www.bidabad.com/doc/pls-novin-pajoohan.ppt http://www.bidabad.com/doc/pls-8-12-saat.ppt http://www.bidabad.com/doc/pls-banking.pdf http://www.bidabad.com/doc/pls-banking-export-deveopment-bank-2.ppt http://www.bidabad.com/doc/charchoobe-bazare-electronic-pls.pdf http://www.ecommerce.gov.ir/earchive/earchivef/item.asp?parentid=43&itemid=182 http://www.bidabad.com/doc/pls-accounting-fa.pdf http://fa.journals.sid.ir/viewpaper.aspx?id=252008 http://www.bidabad.com/doc/pls-business-cycles.pdf http://www.bidabad.com/doc/pls-business-cycles.ppt http://www.bidabad.com/doc/non-usury-finance-it-fa.pdf http://www.bidabad.com/doc/non-usury-finance-it-fa.pdf http://www.bidabad.com/doc/islamic-banking-bond-fa.pdf http://www.bidabad.com/doc/negahi-bar-pls-mfs-jfs.pdf http://www.bidabad.com/doc/legal-analysis-of-non-usury-bonds.pdf http://www.bidabad.com/doc/legal-analysis-of-non-usury-bonds.ppt copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 18 http://www.bidabad.com/doc/gavahi-qarzulhasana-pasandaz.pdf http://www.bidabad.com/doc/gavahi-qarz-paper.ppt بیژن بیدآباد، جلوگیري از نوسانات و بحران .1389های اقتصادي ادواري با ابزار نوین مالي و اصالح ساختار بانكي، http://www.bidabad.com/doc/bohran-va-abzare-mali.pdf ود صفرزاده نساجي، ژینا آقابیگي، سازمان و تشكیالت بانكداري مشاركت در سود و زیان بیژن بیدآباد، مسع (pls) .1389در بانك ملي ایران، http://www.bidabad.com/doc/pls-organization.pdf (mfs) بیژن بیدآباد، مشاركت مالي مضاربه . در نوبت چاپ در پژوهشنامه بانک مسکن، فصلنامه علمی و کاربردی بانک مسکن.1389، http://www.bidabad.com/doc/mfs-paper-fa.pdf (jfs)بیژن بیدآباد، مشاركت مالي جعاله -121، صفحات 1392بانک مسکن، سال دوم، شماره ششم، تابستان ، پویش، فصلنامه علمی و کاربردی 98. http://www.bidabad.com/doc/jfs-paper-fa.pdf .1390بیژن بیدآباد، راهبرد تحول ساختار بانكي، http://www.bidabad.com/doc/rahborde-tahavole-bank.pdf .1390بیژن بیدآباد، اوراق خزانه بدون ربا )ریالي و ارزي(، http://www.bidabad.com/doc/interest-free-t-bond-fa.pdf http://www.bidabad.com/doc/interest-free-t-bond-fa.pptx (pls)بیژن بیدآباد، بازاریابي تأمین مالي مشاركت در سود و زیان راستین، پویش، فصلنامه علمی و کاربردی بانک مسکن، سال دوم، شماره .88-99، صفحات 1392هفتم، زمستان http://www.bidabad.com/doc/pls-marketing.pdf (ifs)بیژن بیدآباد، مشاركت مالي مقاسطه نوبت چاپ در پژوهشنامه بانک مسکن، فصلنامه علمی و کاربردی بانک مسکن.. در 1390، http://www.bidabad.com/doc/ifs-paper-fa.pdf ی راستین، مجموعه مقاالت همایش ملی خدمات الکترونیکی تحولی های مبتنی بر فنآوری اطالعات و ارتباطات در بانکدار بیژن بیدآباد، زیرسیستم . دانشگاه الزهرا، تهران.1390آبان 29-30نوین در توسعه پایدار، http://www.bidabad.com/doc/rastin-bank-it.pdf http://www.bidabad.com/doc/rastin-bank-it.ppt -40صفحات: 1390: آذر 116بیژن بیدآباد، امنیت تعامالت بانکی مبتنی بر فناوری اطالعات در بانکداری راستین، مجله بانک و اقتصاد شماره: 37. http://www.bidabad.com/doc/amniyat-taamolat-banki.pdf .1390الحسنه، هللا محمدي، تکافل اجتماعی راستین و بانکداری قرض بیژن بیدآباد، روح http://www.bidabad.com/doc/takaful-qarzulhasane.pdf (rfs)بیژن بیدآباد، مشارکت مالی اجاره . در نوبت چاپ در پژوهشنامه بانک مسکن، فصلنامه علمی و کاربردی بانک مسکن.1390، http://www.bidabad.com/doc/rfs-paper-fa.pdf اد بیدآباد، شفافیت مالی، حکمرانی و افشای اطالعات بانکی در بانکداری راستین و پیشنهاد مقررات الزم برای ارتقاء آن، مجله بانک و اقتص بیژن . چاپ مجدد در مجموعه مقاالت کنفرانس ملی توسعه مدیریت پولی و بانکی، بانک 24-34صفحات: 1390: اسفند 117شماره: .58-77، صفحات 1392، اسفند 2تهران. چاپ مجدد در حقوق و اقتصاد، ماهنامه علوم انسانی، شماره ،1392بهمن 8-9انصار، http://www.bidabad.com/doc/shafafiyat.pdf .1394قاضی منابع مالی( در بانکداری راستین. تهران، بیژن بیدآباد، شفافیت مالی، حاکمیت شرکتی و افشای اطالعات مجری )مت http://www.bidabad.com/doc/transparency-entrepreneur-fa.pdf سود و زیان راستین، نگرش مدیریت عملیات و فرآیندها. مجموعه پور، اجزای سیستم یکپارچه بانکداری مشارکت در بیژن بیدآباد، محمد صفائي ، پژوهشکده پولی و بانکی، بانک 1390اسفند 1-بهمن 30های پرداخت، المللی بانکداری الکترونیک و نظام مقاالت اولین همایش بین مرکزی ایران، تهران. http://www.bidabad.com/doc/ajza-system-rastin.pdf http://www.bidabad.com/doc/ajza-system-rastin.ppt (iwp)محمود الهیاري فرد، پروتکل برداشت بین بانکی بیژن بیدآباد، ارائه شده در چهارمین کنفرانس فناوری اطالعات و در بانکداری راستین. (ikt2012)دانش ، بابل، ایران. 1391خرداد 2-4دانشگاه صنعتی نوشیروانی بابل، http://www.bidabad.com/doc/iwp-paper-fa.pdf (rst)بیژن بیدآباد، تکافل اجتماعی راستین . پژوهشنامه بانک مسکن، فصلنامه علمی و کاربردی بانک مسکن.1391، http://www.bidabad.com/doc/rst-paper-fa.pdf .1391در بانکداری راستین. (mss) بیژن بیدآباد. تبدیل دارایی به اوراق بهادار http://www.bidabad.com/doc/mms-paper-fa.pdf (bfs)بیژن بیدآباد، مشارکت مالی امانی . پژوهشنامه بانک مسکن، فصلنامه علمی و کاربردی بانک مسکن.1391، http://www.bidabad.com/doc/bfs-paper-fa.pdf (rps)بیژن بیدآباد، تأمین شخصی راستین . پژوهشنامه بانک مسکن، فصلنامه علمی و کاربردی بانک مسکن.1391، http://www.bidabad.com/doc/gavahi-qarzulhasana-pasandaz.pdf http://www.bidabad.com/doc/gavahi-qarz-paper.ppt http://www.bidabad.com/doc/bohran-va-abzare-mali.pdf http://www.bidabad.com/doc/pls-organization.pdf http://www.bidabad.com/doc/mfs-paper-fa.pdf http://www.bidabad.com/doc/jfs-paper-fa.pdf http://www.bidabad.com/doc/rahborde-tahavole-bank.pdf http://www.bidabad.com/doc/interest-free-t-bond-fa.pdf http://www.bidabad.com/doc/interest-free-t-bond-fa.pptx http://www.bidabad.com/doc/pls-marketing.pdf http://www.bidabad.com/doc/ifs-paper-fa.pdf%20%0d%0d http://www.bidabad.com/doc/rastin-bank-it.pdf http://www.bidabad.com/doc/rastin-bank-it.ppt http://www.bidabad.com/doc/amniyat-taamolat-banki.pdf http://www.bidabad.com/doc/takaful-qarzulhasane.pdf http://www.bidabad.com/doc/rfs-paper-fa.pdf http://www.bidabad.com/doc/shafafiyat.pdf http://www.bidabad.com/doc/transparency-entrepreneur-fa.pdf http://www.bidabad.com/doc/ajza-system-rastin.pdf http://www.bidabad.com/doc/ajza-system-rastin.ppt http://www.bidabad.com/doc/iwp-paper-fa.pdf http://www.bidabad.com/doc/rst-paper-fa.pdf http://www.bidabad.com/doc/mms-paper-fa.pdf http://www.bidabad.com/doc/bfs-paper-fa.pdf copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 19 http://www.bidabad.com/doc/rps-paper-fa.pdf .1391بیژن بیدآباد، شرکت سهامی با سرمایه متغیر، http://www.bidabad.com/doc/vjsc-paper-fa.pdf راستین بیژن بیدآباد، نحوه جلوگیری از اسراف منابع بانکی در بانکداری http://www.bidabad.com/doc/esraf-bank-resource-fa.pdf (pls)بیژن بیدآباد، سیستم پایه بانکداری مشارکت در سود و زیان راستین ، پژوهشنامه بانک مسکن، فصلنامه علمی و کاربردی بانک مسکن، .25-63، صفحات 1391سال اول، شماره چهارم، تابستان http://www.bidabad.com/doc/pls-base-fa.pdf .1391بیژن بیدآباد، شمائی از بانکداری راستین، http://www.bidabad.com/doc/rastin-bank-glance-fa.pdf بیژن بیدآباد، ویژگی .18-32، صفحات 1391، شهریور 119های کلی بانکداری راستین، مجله بانک و اقتصاد، شماره http://www.bidabad.com/doc/rastin-bank-general.pdf http://www.bidabad.com/doc/rastin-bank-general.ppt شفیعی. مقررات پیشنهادی اجرای مفاد فرد، مریم حیدری، علیرضا بیژن بیدآباد، سعید عبداللهی، آذرنگ امیراستوار، اسکندر پردل، محمود الهیاری . مجموعه مقاالت کنفرانس ملی توسعه مدیریت پولی و بانکی، 1391اسناد الزم االجرای بانک در بانکداری راستین، بانک ملی ایران، ، تهران.1392بهمن 8-9بانک انصار، http://www.bidabad.com/doc/rastin-bank-ejraye-asnad.pdf http://www.bidabad.com/doc/rastin-bank-ejraye-asnad.pptx ، 81، سال هشتاد و پنجم، شماره 1392در ایران، نامه اتاق بازرگانی، مهر بیژن بیدآباد، محمود اللهیاری فرد، بانکداری راستین و تحول بانکداری . 11-12صفحات https://www.bidabad.com /doc/rastin-bank-change.pdf https://www.noormags.ir/view/fa/articlepage/1053820 mldبیژن بیدآباد، سیستم کشف پولشویی ) ،)1392. http://www.bidabad.com/doc/mld-paper-fa.pdf بیژن بیدآباد، پروژه .1392ریزي بانك ملي ایران، تحقیقات و برنامهاالجرا و مکمل بانکداری راستین برای اصالح نظام بانکی، اداره های الزم http://www.bidabad.com/doc/projects-rastin-banking-fa.pdf .1392یاتی، بیژن بیدآباد، نظری اجمالی بر بانکداری راستین، سیستم نوین بانکداری اسالمی عمل http://www.bidabad.com/doc/rastin-bank-bird-eye-view-fa.pdf (rcm)بیژن بیدآباد، بازار گواهی راستین .1392یران، ریزي بانك ملي ا ، سیستم مکمل بانکداری راستین، اداره تحقیقات و برنامه http://www.bidabad.com/doc/rastin-bank-rcm-fa.pdf در دهبیژن بیدآباد، مدیریت تغییر ساختار بانکی با بانکداری راستین )مدیریت دانش در پیوند و هرس فرآیندها و آموزش استاد شاگرد(، ارائه ش .1396اردیبهشت 20المللی اقتصاد و مدیریت، دانشگاه آزاد اسالمی، رشت، گیالن، دهمین کنفرانس بین http://www.bidabad.com/doc/change-banking-fa.pdf http://www.bidabad.com/doc/change-banking-fa.pptx .1392بیژن بیدآباد، شیوه عملیاتی اوراق مبادله راستین، http://www.bidabad.com/doc/rsb-operations-fa.pdf گذار و مجری براساس قضیه اولر در بانکداری راستین، مجموعه مقاالت کنفرانس ملی توسعه مدیریت توزیع سود مشارکت بین سپرده بیژن بیدآباد، ، تهران.1392بهمن 8-9پولی و بانکی، بانک انصار، http://www.bidabad.com/doc/profit-distribution-euler-fa.pdf http://www.bidabad.com/doc/profit-distribution-euler-fa.ppt الت کنفرانس ملی توسعه مدیریت پولی و بانکی، بانک بیژن بیدآباد، ابزارهای مالی مشتقه و قرضه نوین در بانکداری راستین، مجموعه مقا ، تهران.1392بهمن 8-9انصار، http://www.bidabad.com/doc/rastin-derivatives-fa.pdf .1392بیژن بیدآباد، محصوالت بیمه در بانكداري راستین، http://www.bidabad.com/doc/rastin-insurance-fa.pdf .1392بیژن بیدآباد، محمود الهیاری فرد، حسابداری مشارکت راستین، http://www.bidabad.com/doc/rastin-mosharekat-accounting-fa.pdf .1392ای، حسابرسی، بازرسی، کنترل، پایش و صیانت عملیات(، بیژن بیدآباد، بانکداری اخالقی عملیاتی در بانکداری راستین )اخالق حرفه http://www.bidabad.com/doc/rastin-ethic-banking-fa.pdf نامه اجرائی بانکداری راستین. مجموعه مقاالت بیژن بیدآباد، بررسی فقهی و حقوقی مقررات بانکداری بدون ربا در ایران و پیشنهاد الیحه و آئین قوانین »ات و نظام بانکداری ایران با رویکرد اسالمی با عنوان اولین سمینار از سلسله سمینارهای تخصصی نقد و بررسی قوانین، مقرر ، موسسه نوین پژوهان و پژوهشکده پولی و بانکی بانک مرکزی.1393خرداد 28، «و مقررات مرتبط با عملیات بانکداری http://www.bidabad.com/doc/jurist-legal-banking-fa.pdf http://www.bidabad.com/doc/rps-paper-fa.pdf http://www.bidabad.com/doc/vjsc-paper-fa.pdf http://www.bidabad.com/doc/esraf-bank-resource-fa.pdf http://www.bidabad.com/doc/pls-base-fa.pdf http://www.bidabad.com/doc/rastin-bank-glance-fa.pdf%0d http://www.bidabad.com/doc/rastin-bank-general.pdf http://www.bidabad.com/doc/rastin-bank-general.ppt http://www.bidabad.com/doc/rastin-bank-ejraye-asnad.pdf http://www.bidabad.com/doc/rastin-bank-ejraye-asnad.pptx https://www.noormags.ir/view/fa/articlepage/1053820 http://www.bidabad.com/doc/mld-paper-fa.pdf http://www.bidabad.com/doc/projects-rastin-banking-fa.pdf http://www.bidabad.com/doc/rastin-bank-bird-eye-view-fa.pdf http://www.bidabad.com/doc/rastin-bank-rcm-fa.pdf http://www.bidabad.com/doc/change-banking-fa.pdf http://www.bidabad.com/doc/change-banking-fa.pptx http://www.bidabad.com/doc/rsb-operations-fa.pdf http://www.bidabad.com/doc/profit-distribution-euler-fa.pdf http://www.bidabad.com/doc/profit-distribution-euler-fa.ppt http://www.bidabad.com/doc/rastin-derivatives-fa.pdf http://www.bidabad.com/doc/rastin-insurance-fa.pdf http://www.bidabad.com/doc/rastin-mosharekat-accounting-fa.pdf http://www.bidabad.com/doc/rastin-ethic-banking-fa.pdf http://www.bidabad.com/doc/jurist-legal-banking-fa.pdf copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 20 (rcf)بیژن بیدآباد، تأمین مالی جمعی راستین بهمن 6-7های پرداخت، ، مجموعه مقاالت چهارمین همایش ساالنه بانکداری الکترونیک و نظام 1393. http://www.bidabad.com/doc/rcf-paper-fa.pdf http://www.bidabad.com/doc/rcf-paper-fa.pptx rgfبیژن بیدآباد، تأمین مالی گروهی راستین ) .)1393. http://www.bidabad.com/doc/rgf-paper-fa.pdf (scc)بیژن بیدآباد، تهاتر تعهدات پشت سرهم .1393در بانکداری راستین، http://www.bidabad.com/doc/scc-paper-fa.pdf (rsd)بیژن بیدآباد، سپرده مبادله راستین ،1393. http://www.bidabad.com/doc/rsd-paper-fa.pdf (rsc)بیژن بیدآباد، کارت مبادله راستین ،1393. http://www.bidabad.com/doc/rsc-paper-fa.pdf بیژن بیدآباد، راه حل عملیاتی رفع مشکالت بانکداری کشور، مجموعه مقاالت دومین کنفرانس ملی رویکرد بانکداری اسالمی در تحقق اقتصاد ، اصفهان.1395بهمن 27مقاومتی، مؤسسه آموزش عالی غیرانتفاعی راغب اصفهانی، http://www.bidabad.com/doc/iran-banking-reform-fa.pdf http://www.bidabad.com/doc/iran-banking-reform-fa.pptx ین، نخستین همایش ملی بانکداری و محیط زیست، سازمان حفاظت از محیط بیژن بیدآباد، بانکداری سبز و تأمین مالی پایدار در بانکداری راست ، تهران.1395دی 19زیست و مرکز آموزش علمی و کاربردی بانک تجارت، http://www.bidabad.com/doc/green-rastin-banking-fa.pdf http://www.bidabad.com/doc/green-rastin-banking-fa.ppt ، تهران.1395محمود الهیاری فرد، بیژن بیدآباد، حسابداری اقالم زیر خط ترازنامه در حسابداری مشارکت راستین، http://www.bidabad.com/doc/off-balance-rastin-accounting-fa.pdf english documents english books bidabad, bijan, new operational islamic banking system, volume one, theoretical foundations, lap lambert academic publishing, omniscriptum gmbh & co. kg, 2014, isbn: 978-3-659-54463-7. http://www.amazon.com/rastin-banking-operational-theoreticalfoundations/dp/3659544639/ref=sr_1_2?s=books&ie=utf8&qid=1402563518&sr=1-2 http://pub.npdr.ir/product/rastin-banking/ bidabad, bijan, new operational islamic banking system, volume two, applicational issues, lap lambert academic publishing, omniscriptum gmbh & co. kg, 2014, isbn: 978-3-659-55210-6. http://www.amazon.com/rastin-banking-ii-operationalapplication/dp/3659552100/ref=sr_1_1?s=books&ie=utf8&qid=1404643353&sr=1-1 http://pub.npdr.ir/product/rastin-banking-volume-ii/ bidabad, bijan, new operational islamic banking system, volume three, legal issues, lap lambert academic publishing, omniscriptum gmbh & co. kg, 2020. english papers bidabad, bijan, economic-juristic analysis of usury in consumption and investment loans and contemporary jurisprudence shortages in exploring legislator commandments. proceeding of the 2nd international islamic banking conference. the monash university of malaysia. 9-10 september 2004. reprinted in: national interest, journal of the center for strategic research, vol. 2, no. 1, winter 2006, pp. 72-90. tehran, iran. republished in (revised): international journal of islamic business & management, 3(2), 1-15, 2019 . https://www.cribfb.com/journal/index.php/ijibm/article/view/275 http://www.bidabad.com/doc/reba-en.pdf bidabad, bijan, non-usury bank corporation (nubankco), the solution to islamic banking, proceeding of the 3rd international islamic banking and finance conference, the monash university, kl, malaysia, 16-17 november, 2005. international journal of shari’ah and corporate governance research, 2(1), 53-66, 2019 . https://www.cribfb.com/journal/index.php/ijscgr/article/view/276 http://www.bidabad.com/doc/nubankco-en.pdf bijan bidabad, mahmoud allahyarifard. it role in fulfillment of profit & loss sharing (pls) mechanism. proceeding of the 3rd international islamic banking and finance conference, the monash university, kl, malaysia, 16-17 november, 2005. international journal of islamic banking and finance research, 3(2), 44-59, 2019 . https://www.cribfb.com/journal/index.php/ijibfr/article/view/274 http://www.bidabad.com/doc/english-pls-5.pdf http://www.bidabad.com/doc/pls-it-en.ppt http://www.bidabad.com/doc/rcf-paper-fa.pdf http://www.bidabad.com/doc/rcf-paper-fa.pptx http://www.bidabad.com/doc/rgf-paper-fa.pdf%20%0d http://www.bidabad.com/doc/scc-paper-fa.pdf http://www.bidabad.com/doc/rsd-paper-fa.pdf http://www.bidabad.com/doc/rsc-paper-fa.pdf http://www.bidabad.com/doc/iran-banking-reform-fa.pdf http://www.bidabad.com/doc/iran-banking-reform-fa.pptx http://www.bidabad.com/doc/green-rastin-banking-fa.pdf http://www.bidabad.com/doc/green-rastin-banking-fa.pdf http://www.bidabad.com/doc/green-rastin-banking-fa.ppt http://www.bidabad.com/doc/off-balance-rastin-accounting-fa.pdf http://www.bidabad.com/doc/off-balance-rastin-accounting-fa.pdf http://www.amazon.com/rastin-banking-operational-theoretical-foundations/dp/3659544639/ref=sr_1_2?s=books&ie=utf8&qid=1402563518&sr=1-2 http://www.amazon.com/rastin-banking-operational-theoretical-foundations/dp/3659544639/ref=sr_1_2?s=books&ie=utf8&qid=1402563518&sr=1-2 http://pub.npdr.ir/product/rastin-banking/ http://www.amazon.com/rastin-banking-ii-operational-application/dp/3659552100/ref=sr_1_1?s=books&ie=utf8&qid=1404643353&sr=1-1 http://www.amazon.com/rastin-banking-ii-operational-application/dp/3659552100/ref=sr_1_1?s=books&ie=utf8&qid=1404643353&sr=1-1 http://pub.npdr.ir/product/rastin-banking-volume-ii/ https://www.cribfb.com/journal/index.php/ijibm/article/view/275 http://www.bidabad.com/doc/reba-en.pdf https://www.cribfb.com/journal/index.php/ijscgr/article/view/276 http://www.bidabad.com/doc/nubankco-en.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/274 http://www.bidabad.com/doc/english-pls-5.pdf http://www.bidabad.com/doc/pls-it-en.ppt copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 21 bidabad, bijan, mahmoud allahyarifard. implementing it to fulfill profit & loss sharing mechanism. islamic finance news (ifn), vol. 3, issue 3, 6, february 2006, pp. 11-15. http://www.bidabad.com/doc/summery-pls-it-1.pdf bidabad, bijan; mahmoud allahyarifard. assets and liabilities management in islamic banking. proceeding of the 3rd international conference on islamic banking and finance, risk management, regulation and supervision, bidakara, jakarta, indonesia, 23-26 february, 2010. pp. 396-413. international journal of islamic banking and finance research, 3(2), 32-43, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/272 http://www.bidabad.com/doc/alm-english.pdf bijan bidabad. non-usury banking fits the change strategy: the solution to revive the economy. american economic & social review, 5(1), 49-61, 2019. https://www.cribfb.com/journal/index.php/aesr/article/view/283 http://www.bidabad.com/doc/pls-paper-en-5.pdf bidabad, bijan, mahmoud allahyarifard. the executive mechanism of rastin profit and loss sharing (pls) banking. 2009. indian journal of finance and banking, 3(1), 23-39, 2019 . https://www.cribfb.com/journal/index.php/ijfb/article/view/308 http://www.bidabad.com/doc/pls-banking-executive-mechanism.pdf http://www.bidabad.com/doc/pls-en.pptx bijan bidabad, mahmoud allahyarifard. it-based usury-free financial innovations. proceeding of ecdc 2010, 5th international conference on e-commerce in developing countries: with focus on e-banking & e-insurance. ecdc 2010, 15-16 september 2010. american finance & banking review, 4(1), 39-49, 2019 . https://www.cribfb.com/journal/index.php/amfbr/article/view/289 http://www.bidabad.com/doc/non-usury-finance-it-en.pdf bidabad, bijan, mahmoud allahyarifard. usury-free bonds and islamic central banking monetary instruments. 2010. http://www.bidabad.com/doc/islamic-banking-bond-en.pdf bijan bidabad. stabilizing business cycles by pls banking and ethic economics. 2010. international journal of shari’ah and corporate governance research, 2(1), 67-82, 2019. https://www.cribfb.com/journal/index.php/ijscgr/article/view/284 http://www.bidabad.com/doc/pls-business-cycles-en.pdf bidabad, bijan, mahmoud allahyarifard. accounting procedures for profit and loss sharing (pls) banking. 2010. http://www.bidabad.com/doc/pls-accounting-en.pdf bidabad, bijan, abul hassan, ben ali mohamed sami, mahmoud allahyarifard. interest-free bonds and central banking monetary instruments. international journal of economics and finance. vol. 3, no. 3, aug 2011, pp.234-241. http://www.ccsenet.org/journal/index.php/ijef/article/download/11665/8300 bijan bidabad, fluctuations and business cycles prevention by new financial instruments and banking structure reform. 2011. international journal of accounting & finance review, 4(1), 35-50, 2019 . https://www.cribfb.com/journal/index.php/ijafr/article/view/282 http://www.bidabad.com/doc/fluctuations-and-cycles.pdf bidabad, bijan, mudarebah financial sharing (mfs). journal of islamic economics, banking and finance, jiebf, volume 10, number 1, january april 2014, pp. 56-68. http://www.bidabad.com/doc/mfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n1_article3.pdf bijan bidabad, joalah financial sharing (jfs). journal of islamic economics, banking and finance, volume-12, no. 1, januarymarch, 2016, pp. 33-48. http://www.bidabad.com/doc/jfs-paper-en.pdf http://ibtra.com/pdf/journal/v12_n1_article2.pdf bijan bidabad, interest-free treasury bonds (iftb), 2011. interest-free treasury bonds (iftb). international journal of shari’ah and corporate governance research, 2(2), 13-21, 2019. https://www.cribfb.com/journal/index.php/ijscgr/article/view/306 http://www.bidabad.com/doc/interest-free-t-bond-en.pdf http://www.bidabad.com/doc/iftb-en.pptx bijan bidabad, interest-free treasury bonds (iftb), islamic finance and legal clarifications, 2011. international journal of islamic business & management, 3(1), 21-29, 2019. http://www.bidabad.com/doc/interest-free-t-bond-feqhi-en.pdf http://www.bidabad.com/doc/summery-pls-it-1.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/272 http://www.bidabad.com/doc/alm-english.pdf https://www.cribfb.com/journal/index.php/aesr/article/view/283 http://www.bidabad.com/doc/pls-paper-en-5.pdf https://www.cribfb.com/journal/index.php/ijfb/article/view/308 http://www.bidabad.com/doc/pls-banking-executive-mechanism.pdf http://www.bidabad.com/doc/pls-en.pptx https://www.cribfb.com/journal/index.php/amfbr/article/view/289 http://www.bidabad.com/doc/non-usury-finance-it-en.pdf http://www.bidabad.com/doc/islamic-banking-bond-en.pdf https://www.cribfb.com/journal/index.php/ijscgr/article/view/284 http://www.bidabad.com/doc/pls-business-cycles-en.pdf http://www.bidabad.com/doc/pls-accounting-en.pdf http://www.ccsenet.org/journal/index.php/ijef/article/download/11665/8300 https://www.cribfb.com/journal/index.php/ijafr/article/view/282 http://www.bidabad.com/doc/fluctuations-and-cycles.pdf http://www.bidabad.com/doc/mfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n1_article3.pdf http://www.bidabad.com/doc/jfs-paper-en.pdf https://www.cribfb.com/journal/index.php/ijscgr/article/view/306 http://www.bidabad.com/doc/interest-free-t-bond-en.pdf http://www.bidabad.com/doc/iftb-en.pptx http://www.bidabad.com/doc/interest-free-t-bond-feqhi-en.pdf copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 22 https://www.cribfb.com/journal/index.php/ijibm/article/view/258/353 bidabad, bijan, abul hassan, ben ali mohamed sami, mahmoud allahyarifard. interest-free bonds financial innovation, a monetary instrument for economy at crisis. journal of economic cooperation and development (jecd). 32, 1, 2011, 55-70. http://www.sesric.org/jecd/jecd_articles/art10102201-2.pdf bidabad, bijan, deposits and loans interest rates lag structure and business cycles (case study of united states). 2011. http://www.bidabad.com/doc/interest-rates-lags-and-cycles.pdf bidabad, bijan, installment financial sharing (ifs): a financial subsystem of rastin pls banking. international journal of islamic banking and finance research, 3(1), 28-42, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/267 http://www.bidabad.com/doc/ifs-paper-en.pdf bijan bidabad, abul hassan, does the interest rate form business cycle?, 2011. international journal of accounting & finance review, 4(1), 29-34, 2019 . https://www.cribfb.com/journal/index.php/ijafr/article/view/281 http://www.bidabad.com/doc/interest-rate-cycle.pdf bidabad, bijan, rent financial sharing (rfs). journal of islamic economics, banking and finance, vol. 10 no. 2, pp.: 38-53, april-june 2014.. http://www.bidabad.com/doc/rfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n2_article2.pdf bidabad, bijan, rastin social takaful (rst). journal of islamic economics, banking and finance, jiebf, volume 11, number 1, january march 2015, pp.: 13-23. http://ibtra.com/pdf/journal/v11_n1_article1.pdf http://www.bidabad.com/doc/rst-paper-en.pdf bijan bidabad, mortgage securitization system (mss), a complementary system of rastin banking. international journal of law and management (ijlma), vol. 59 issue: 6, pp.778-783, 2017. emerald group publishing limited https://doi.org/10.1108/ijlma-05-2016-0045 http://www.bidabad.com/doc/mss-paper-en.pdf bijan bidabad, bail financial sharing (bfs): a financial subsystem of rastin pls banking. bank melli iran, tehran, iran, 2014. international journal of islamic banking and finance research, 3(1), 21-27, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/266 http://www.bidabad.com/doc/bfs-paper-en.pdf bidabad, bijan, rastin personal security (rps). journal of islamic economics, banking and finance, jiebf, volume 11, number 2, april june 2015, pp. 47-61. http://ibtra.com/pdf/journal/v11_n2_article3.pdf http://www.bidabad.com/doc/rps-paper-en.pdf bijan bidabad, joint stock company with variable capital (jscvc), international journal of law and management (ijlma), emerald group publishing limited, vol. 56, iss: 4, pp.302 – 310, 2014. http://dx.doi.org/10.1108/ijlma-09-2012-0031 http://www.bidabad.com/doc/vjsc-paper-en.pdf bidabad, bijan, rastin profit and loss sharing (pls) base system. journal of islamic economics, banking and finance, pp. 3257, vol. 9, no. 4, oct-dec 2013. http://ibtra.com/pdf/journal/v9_n4_article2.pdf http://www.bidabad.com/doc/pls-base-en.pdf bijan bidabad, money laundering detection system (mld), a complementary system of rastin banking, journal of money laundering control, vol. 20 issue: 4, pp. 354-366, 2017. https://doi.org/10.1108/jmlc-04-2016-0016 http://www.bidabad.com/doc/mld-paper-en.pdf bijan bidabad, general characteristics of rastin banking. proceeding of the 3rd international conference on economics, political, law and fiscal sciences (epls '14), world scientific and engineering academy and society (wseas). transilvania university of brasov, brasov, romania, june 26-28, 2014. http://www.bidabad.com/doc/rastin-bank-general-en.pdf http://www.bidabad.com/doc/rastin-bank-general-en.ppt bidabad, bijan, a glance at rastin banking, 2013. http://www.bidabad.com/doc/rastin-bank-glance-en.pdf https://www.cribfb.com/journal/index.php/ijibm/article/view/258/353 http://www.sesric.org/jecd/jecd_articles/art10102201-2.pdf http://www.bidabad.com/doc/interest-rates-lags-and-cycles.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/267 http://www.bidabad.com/doc/ifs-paper-en.pdf https://www.cribfb.com/journal/index.php/ijafr/article/view/281 http://www.bidabad.com/doc/interest-rate-cycle.pdf http://www.bidabad.com/doc/rfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n2_article2.pdf http://ibtra.com/pdf/journal/v11_n1_article1.pdf http://www.bidabad.com/doc/rst-paper-en.pdf https://doi.org/10.1108/ijlma-05-2016-0045 http://www.bidabad.com/doc/mss-paper-en.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/266 http://www.bidabad.com/doc/bfs-paper-en.pdf http://ibtra.com/pdf/journal/v11_n2_article3.pdf http://www.bidabad.com/doc/rps-paper-en.pdf http://dx.doi.org/10.1108/ijlma-09-2012-0031 http://www.bidabad.com/doc/vjsc-paper-en.pdf http://ibtra.com/pdf/journal/v9_n4_article2.pdf http://www.bidabad.com/doc/pls-base-en.pdf%20%0d https://doi.org/10.1108/jmlc-04-2016-0016 http://www.bidabad.com/doc/mld-paper-en.pdf http://www.bidabad.com/doc/rastin-bank-general-en.pdf http://www.bidabad.com/doc/rastin-bank-general-en.ppt http://www.bidabad.com/doc/rastin-bank-glance-en.pdf copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 23 bidabad, bijan, rastin banking, new operational islamic banking system (a bird's eye view). islamic finance news (ifn), vol. 10, issue: 28, 17, july, 2013, pp. 16-18. http://www.bidabad.com/doc/rastin-bank-bird-eye-view-en.pdf bijan bidabad, islamic monetary policy, 2013. international journal of islamic banking and finance research, 3(2), 1-16, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/269 http://www.bidabad.com/doc/islamic-monetary-policy-en.pdf bidabad, bijan, rastin certificate market (rcm), complementary system of rastin banking, 2013. international journal of islamic business & management, 3(1), 35-43, 2019. https://www.cribfb.com/journal/index.php/ijibm/article/view/260 http://www.bidabad.com/doc/rastin-bank-rcm-en.pdf bijan bidabad, sovereign wealth fund asset and liability management by rastin banking financial instruments (rastin certificates and rastin swap bonds), first national development fund of iran (ndfi) international conference (nic2013) sovereign wealth, asset allocation and risk management, kish island, persian gulf, iran, nic 2013, 27-28 october 2013. american finance & banking review, 4(1), 1-16, 2019. https://www.cribfb.com/journal/index.php/amfbr/article/view/285 http://www.bidabad.com/doc/swf-alm-en.pdf http://en.ndf.ir/international-conference/nic-2013/conference-full-paper.aspx bijan bidabad, mahmoud allahyarifard, interbank withdrawal protocol (iwp), complementary system of rastin banking 2013. international journal of islamic business & management, 3(1), 30-34, 2019. https://www.cribfb.com/journal/index.php/ijibm/article/view/259 http://www.bidabad.com/doc/iwp-paper-en.pdf bijan bidabad, roohollah mohammadi; mahshid sherafati, social takaful and qard ul-hassanah banking convergences (a functional approach), journal of applied science and agriculture (jasa) november issue 2013. http://www.bidabad.com/doc/takaful-en.pdf bidabad, bijan, change management of banking system at national level by rastin banking (knowledge management, empowerment, prune and graft, and apprenticeship), presented at the 10th international conference on economics and management, islamic azad university, rasht, iran, 2017. review of behavioral aspect in organizations and society, 2019, 1(1), 11. review of behavioral aspect in organizations and society, 1(1), 57-70 . https://doi.org/10.32770/rbaos.vol157-70 http://www.bidabad.com/doc/change-banking-en.pdf http://www.bidabad.com/doc/change-banking-en.pptx bijan bidabad (2019) insurance products in rastin profit and loss sharing banking. indian journal of finance and banking, 3(1), 40-54. https://www.cribfb.com/journal/index.php/ijfb/article/view/344 http://www.bidabad.com/doc/rastin-insurance-en.pdf bijan bidabad, abul hassan, dynamic lag structure of deposits and loans interest rates and business cycles formation. proceeding of the 3rd international conference on economics, political, law and fiscal sciences (epls '14), world scientific and engineering academy and society (wseas). transilvania university of brasov, brasov, romania, june 26-28, 2014. http://www.bidabad.com/doc/interest-rates-cycle-en.pdf http://www.bidabad.com/doc/interest-rates-cycle-en.ppt bijan bidabad, rastin crowdfunding (rcf): a financial subsystem of rastin banking. bank melli iran, tehran, 2014. international journal of islamic banking and finance research, 3(1), 13-20, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/265 http://www.bidabad.com/doc/rcf-paper-en.pdf bijan bidabad, rastin group funding (rgf): a financial subsystem of rastin banking. bank melli iran, tehran, 2014. international journal of islamic banking and finance research, 3(1), 43-48, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/268 http://www.bidabad.com/doc/rgf-paper-en.pdf bijan bidabad, mahshid sherafati, bank information disclosure, financial transparency and corporate governance in rastin banking, international journal of shari’ah and corporate governance research, 2(1), 1-13, 2019. https://www.cribfb.com/journal/index.php/ijscgr/article/view/257 http://www.bidabad.com/doc/shafafiyat-en.pdf http://www.bidabad.com/doc/rastin-bank-bird-eye-view-en.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/269 http://www.bidabad.com/doc/islamic-monetary-policy-en.pdf https://www.cribfb.com/journal/index.php/ijibm/article/view/260 http://www.bidabad.com/doc/rastin-bank-rcm-en.pdf https://www.cribfb.com/journal/index.php/amfbr/article/view/285 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cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 24 bijan bidabad, mahshid sherafati, financial transparency, governance and public disclosure for entrepreneur (financial resource receiver) in rastin banking system. tehran, iran, 2015. http://www.bidabad.com/doc/transparency-entrepreneur-en.pdf bijan bidabad, azarang amirostovar, mahshid sherafati, financial transparency, corporate governance and information disclosure of the entrepreneur’s corporation in rastin banking. international journal of law and management (ijlma), emerald group publishing limited, vol:59, iss:5, pp.636-651, 2017. https://doi.org/10.1108/ijlma-01-2016-0003 bijan bidabad, saeid abdollahi, mahshid sherafati, rohollah mohammadi, proposed regulations for enforcement of purports of binding banking documents in rastin banking, 2015. international journal of small and medium enterprises, 2(1), 23-49, 2019. https://www.cribfb.com/journal/index.php/ijsmes/article/view/321 http://www.bidabad.com/doc/rastin-bank-ejraye-asnad-en.pdf bijan bidabad, saeed abdollahi, mahshid sherafati, enforcement of the purports of binding banking documents in rastin banking – part i. international journal of law and management (ijlma), emerald group publishing limited, vol:59, iss:1, pp. 52-65, 2017. https://doi.org/10.1108/ijlma-07-2015-0041 bijan bidabad, saeed abdollahi, mahshid sherafati, enforcement of the purports of binding banking documents in rastin banking – part ii. international journal of law and management (ijlma), emerald group publishing limited, vol:59, iss:2, pp.178-191, 2017. https://doi.org/10.1108/ijlma-10-2015-0055 bijan bidabad, mahshid sherafati, sustainable financing and anti-squandering measures in rastin banking. international journal of law and management (ijlma), emerald group publishing limited, vol: 59, issue: 6, pp. 939-949, 2017. https://doi.org/10.1108/ijlma-04-2016-0037 http://www.bidabad.com/doc/esraf-bank-resource-en.pdf bijan bidabad, serial commitments clearance (scc) in rastin banking. international journal of law and management (ijlma), vol. 57, iss: 6, 2015, pp. 600-609, emerald group publishing limited. http://dx.doi.org/10.1108/ijlma-02-2015-0007 http://www.bidabad.com/doc/scc-paper-en.pdf bijan bidabad, rastin swap deposit (rsd): a financial account of rastin banking. tehran, 2015. international journal of islamic banking and finance research, 3(2), 17-23, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/270 http://www.bidabad.com/doc/rsd-paper-en.pdf bijan bidabad, rastin swap card (rsc): a financial instrument of rastin banking. tehran, 2015. international journal of islamic banking and finance research, 3(2), 24-31, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/271 http://www.bidabad.com/doc/rsc-paper-en.pdf bijan bidabad, mahshid sherafati, operational ethical banking in rastin banking (professional ethics, audit, inspection, control, monitoring and preservation). international journal of law and management (ijlma), emerald group publishing limited, vol: 58, iss: 4, 2016, pp. 416-443. http://dx.doi.org/10.1108/ijlma-07-2015-0037 http://www.bidabad.com/doc/rastin-ethic-banking-en.pdf bijan, bidabad, mahmoud allahyarifard, mahshid sherafati, (2019) rastin partnership accounting, part i general procedure, journal of islamic accounting and business research. http://www.bidabad.com/doc/rastin-mosharekat-accounting-en.pdf https://doi.org/10.1108/jiabr-04-2016-0049 bijan bidabad, abul hassan, dynamic lag structure of deposits and loans interest rates and business cycles formation. journal of financial regulation and compliance, vol. 25 issue: 2, pp.114-132, 2017 . http://dx.doi.org/10.1108/jfrc-09-2016-0078 bijan bidabad, general regulatory framework in rastin profit and loss sharing banking (part i-operational context). journal of business and finance in emerging markets, jbfem, [s.l.], v. 1, n. 1, p. 11-26, may 2018. issn 2580-5568. https://doi.org/10.32770/jbfem.vol111-26 http://www.bidabad.com/doc/rastin-regulatory-en-i.pdf http://www.bidabad.com/doc/transparency-entrepreneur-en.pdf https://doi.org/10.1108/ijlma-01-2016-0003 https://www.cribfb.com/journal/index.php/ijsmes/article/view/321 http://www.bidabad.com/doc/rastin-bank-ejraye-asnad-en.pdf https://doi.org/10.1108/ijlma-07-2015-0041 https://doi.org/10.1108/ijlma-10-2015-0055 https://doi.org/10.1108/ijlma-04-2016-0037 http://www.bidabad.com/doc/esraf-bank-resource-en.pdf http://dx.doi.org/10.1108/ijlma-02-2015-0007 http://www.bidabad.com/doc/scc-paper-en.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/270 http://www.bidabad.com/doc/rsd-paper-en.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/271 http://www.bidabad.com/doc/rsc-paper-en.pdf%0d http://dx.doi.org/10.1108/ijlma-07-2015-0037 http://www.bidabad.com/doc/rastin-ethic-banking-en.pdf http://www.bidabad.com/doc/rastin-mosharekat-accounting-en.pdf https://doi.org/10.1108/jiabr-04-2016-0049 http://dx.doi.org/10.1108/jfrc-09-2016-0078 https://doi.org/10.32770/jbfem.vol111-26 http://www.bidabad.com/doc/rastin-regulatory-en-i.pdf copyright © cc-by-nc 2019, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 2; 2019 25 bijan bidabad, general regulatory framework in rastin profit and loss sharing banking (part ii-legal groundwork). journal of business and finance in emerging markets, jbfem, jbfem, [s.l.], v. 1, n. 2, p. 109-126, nov. 2018. issn 25805568. https://doi.org/10.32770/jbfem.vol1109-126 http://www.bidabad.com/doc/rastin-regulatory-en-ii.pdf bijan bidabad, general regulatory framework in rastin profit and loss sharing banking (part iii-auxiliary provisions). journal of business and finance in emerging markets, jbfem, may 2019, vol 2, no. 1, pp. 51-65. issn 25805568. https://doi.org/10.32770/jbfem.vol251-66 http://www.bidabad.com/doc/rastin-regulatory-en-iii.pdf bijan bidabad, rohollah mohammadi, mahshid sherafati, organizational design and rules in rastin profit and loss sharing banking. international journal of small and medium enterprises, 2(1), 9-22, 2019 . https://www.cribfb.com/journal/index.php/ijsmes/article/view/320 http://www.bidabad.com/organizational-structure-paper-en.pdf bidabad, bijan, mahmoud allahyarifard, mahshid sherafati. rastin partnership accounting, part i: general procedure, journal of islamic accounting and business research, 2019. http://www.bidabad.com/doc/rastin-partnership-accounting-i-en.pdf https://doi.org/10.1108/jiabr-04-2016-0049 bidabad, bijan. rastin partnership accounting, part ii: mudarabah financial sharing (mfs). 2019. http://www.bidabad.com/doc/rastin-partnership-accounting-ii-en.pdf bidabad, bijan. rastin partnership accounting: part iii: instalment financial sharing (ifs). 2019. http://www.bidabad.com/doc/rastin-partnership-accounting-iii-en.pdf copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). https://doi.org/10.32770/jbfem.vol1109-126 http://www.bidabad.com/doc/rastin-regulatory-en-ii.pdf https://doi.org/10.32770/jbfem.vol251-66 http://www.bidabad.com/doc/rastin-regulatory-en-iii.pdf https://www.cribfb.com/journal/index.php/ijsmes/article/view/320 http://www.bidabad.com/organizational-structure-paper-en.pdf http://www.bidabad.com/doc/rastin-partnership-accounting-i-en.pdf https://doi.org/10.1108/jiabr-04-2016-0049 http://www.bidabad.com/doc/rastin-partnership-accounting-ii-en.pdf http://www.bidabad.com/doc/rastin-partnership-accounting-iii-en.pdf asian finance & banking review vol. 4, no. 2; 2020 issn 2576-1161 e-issn 2576-1188 published by cribfb, usa 22 impact of covid-19 in bangladesh stock market sunjida haque business graduate dhaka, bangladesh e-mail: haquesunjida@gmail.com dr. tanbir ahmed chowdhury professor department of business administration east west university, bangladesh e-mail: tanbir@ewubd.edu abstract the world's big economies are roiled and going under a devastating threat amid the impact of the covid-19 pandemic. no country will be safe as this virus will eventually outbreak everywhere, regardless of how countries prepare to avoid it. the economic ramification as well as the stock market crisis will be uncertain due to the extended suspension of economic activities in almost every country. no wonder, the clattered stock markets of bangladesh which have already got the adjective of “the worst stock market in the world” because of inefficient and irrational fluctuations in previous years will experience a colossal crisis due to the pandemic. the article provides an investigation on comparable analysis of the impact on stock markets of bangladesh, dhaka stock exchange, and chittagong stock exchange, before and after the pandemic situation with current market data. we also examine the potential consequence of policy interventions to the market and the investors during a pandemic. keywords: covid-19, bangladesh stock market, market operators, pandemic. introduction at this moment in time, the coronavirus covid-19 epidemic is the prescribed global threat to mankind and the significant difficulty we have faced since world war ii (coronavirus disease covid-19 pandemic | undp in bangladesh, 2020). as of writing this on 9 th august, covid-19 has affected 188 countries across the world, with about 20 million confirmed cases and more than 700000 people lost their lives (“covid-19 pandemic,” 2020). therefore, this breakout is considered as a public health emergency of international concern and officially proclaimed as a global pandemic by the world health organization on march 11, 2020(statement on the second meeting of the international health regulations (2005) emergency committee regarding the outbreak of novel coronavirus (2019-ncov), 2020). this pandemic was first confirmed in bangladesh by the institute of epidemiology, disease control and research (iedcr) on 8 march 2020 and its first death on march 18, 2020(express, 2020).it is reflected from figure 1 mailto:haquesunjida@gmail.com mailto:tanbir@ewubd.edu https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 23 that as of july 30, 2020, the death rate approximately 154% higher than march 31, 2020, despite a nation-wide lockdown imposed by the government. the total number of confirmed cases around the country is growing at breakneck speed and has reached more than 2 hundred 25 thousand as of august 11, 2020 (bangladesh coronavirus, 2020). according to statistics, amongst the most ill-protected countries to be affected by the rapidly expanding virus, bangladesh has been pinpointed as one of the 25 th (covid19 | water aid bangladesh, 2020). the severity onslaught of covid-19 seriously dented the country’s economy which was already in a depressing state with major indicators such as negative export-import growth, significant revenue drop, shrinking private sector investment, rising non-performing loans documented in 2019 (mohiuddin, 2020). because of market analysts, the capital markets of bangladesh passed a hazardous time over the last 12 months for instance, the dhaka stock exchange (dse) nosedived to a new 41 month low in december 2019 (hamim, 2020). the unprecedented impact on the stock market, suspension of all kinds of trading, settlement, and official activities triggered by covid-19 produce possibly persistent national economic disruption. the dhaka stock exchange was established as east pakistan stock exchange association ltd on april 28, 1954. formal trading of the bourse began in 1956. the service on the stock exchange continued uninterrupted until 1971. the trading was suspended during the liberation war in 1971. trading on dse resumed in 1976 with a change in the economic policy of the then government. since then the stock exchange has continued its journey and development activities. on august 10, 1998, automated on-line screen-based trading system began. the dhaka stock exchange is registered as a public limited company. it is a self regulatory organization and its activities are regulated by articles of association, own rules, regulations and bye-laws, companies act-1994, securities and exchange ordinance 1969, and securities and exchange rules 1987. after the successful operation of dse, the chittagong stock exchange (cse) was established in 1995 which also helps to meet the increased demand of the capital market. automated trading systems have been introduced in both dse and cse. in the history of bangladesh, there were two market crashes, viz; in 1996, it was a speculative bubble and in 2011, the market was overvalued. the chittagong stock exchange (cse) began its journey on 10th october of 1995 from chittagong city through the cry-out trading system with the promise to create a state-of-the-art bourse in the country. founder members of the proposed chittagong stock exchange approached the bangladesh government in january 1995 and obtained the permission of the securities and exchange commission (sec) on february 12, 1995, for establishing the country's second stock exchange. the exchange was comprised of twelve board members and run by an independent secretariat from the very first day of its inception. cse was formally opened by the then honorable prime minister of bangladesh on 4th november 1995. this paper aims at focusing on the pre-2020 situation of the stock market, of both dse and cse, and how it is reacting presently to the covid-19 pandemic using the following variables: share price index, circuit breaker, interruption of trading hours, etc. furthermore, the paper points out some key attempts taken by the government to alleviate the pandemic’s economic threat. finally, this paper analyzes the impacts of those measures during this pandemic situation. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 24 figure 1. illustration of the total number of infection, recovery, and death rates increases from march 2020 to july 2020. source: online briefing of iedcr. data collected from31st march to 30 th july. literature survey of recent pandemic by late december of 2019, the chinese government informed who about various cases of pneumonia with unknown etiology. the hunan seafood market in wuhan city which is an emerging business hub of china is where this wide-spreading virus primarily originated and within the first fifty days, killed over and above eighteen hundred and infected over seventy thousand people (shereen et al., 2020). therefore, bats could be the possible primary reservoir as it has close genetic similarity to bat coronaviruses, and also this contagious virus is a pathogenic viral infection caused by severe acute respiratory syndrome coronavirus 2 (sars-cov-2). south korea was the second country to experience a major outbreak of covid-19. as of writing this, the us tops the list of affected countries with nearly 5 million cases and more than one hundred sixty-seven thousand deaths, closely followed by brazil, india, and mexico(new cases of covid-19 in world countries, 2020). in south asia, india’s caseload rises to the world’s third-largest after the government lifted its lockdown after two months of restrictions, followed by pakistan. in bangladesh, the daily infection has been recorded 24.14 percent while the fatality rate has been 1.30 percent on the 21 st week of infection (developer), n.d.). the daily testing rate remained below 100 per day till march 25, however as a spike has been seen in the number of corona-virus cases the testing booths, as well as the testing rate, has increased significantly to 87 and 1227988 respectively. nationwide restriction were imposed to curb the virus imposed on march 26, 2020 weeks after the country’s first covid-19 cases were confirmed have been gradually eased from may 31 st even though the country logged a soaring number of infections and deaths. the on-going corona-virus pandemic has had a large scale and serious implications upon financial markets which lead to major economic turmoil around the world. in the last week of february 2020 the world saw all major stock markets around the glove crash, leaving the investors traumatized. during this period, the csi 300 index in china decreased by 12.1 percent https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 25 of its value, whereas the ftse mib index in italy declined by 27.3 percent of its value(covid19, 2020). one of the most widely followed stock indices in the united states, the s&p 500 tumbled by 11.5 percent and on 24th february, a 3.4 percent reduction results in the biggest oneday sell-off for two years. since the financial crisis in 2008, this was the worst week for stock markets around the world(choking global stock markets, 2020). economists stressed that the global economy will contract 4.9% in 2020 which is worse than its previous forecast of a 3% contraction(otani, 2020). however, stock markets worldwide nearly healed back to the previous shape from late march as soon as multiple packages have been announced to revive their pandemic hit economies by almost all the countries. consequently, the s&p 500 index regained 37 percent to 3066, the euro stoxx 50 recovered 35 percent to 3229 and the sensex also rebounded 29 percent to 33605 by18 th junefrom late march(why is bangladesh’s stock market bearish when global stocks are on bull run?, 2020). figure 2. this figure plots the reaction of stock markets of five renowned stock exchanges, dow jones, ftse100, nikkei 225, shanghai, and sensex during the pandemic. the data were collected based on the average month-end index of each month from january 2020 to july 2020. source: tradingeconomics.com. the already rattled stock market in bangladesh has begun to reflect the adverse impacts of the coronavirus pandemic since february 2020. the dhaka and chittagong stock exchanges had to stay shut from march 26, 2020, to may 31, 2020 to contain the contagion, however, thereafter a sharp decline in trading activities was observed owing to economic and financial uncertainty. on june 5, 2020, the trading value of dse was at tk 430 million which was 13 years low due to the threat of the novel coronavirus. along with daily market volatility of 2.20 percent the market value of equities tumbled by 11.50 percent from february 27, 2020, to june 10, 2020. although the government publicized an enormous stimulus package amounting to tk 28256.03 25409.36 21917.16 24345.72 25383.11 25812.88 7286.01 6580.61 5671.96 5901.21 6076.6 6169.74 23205.18 21142.96 18917.01 20193.69 21877.89 22288.14 2976.528 2880.3037 2750.2961 2860.0823 2852.3513 2984.674 40723.49 38297.29 29468.49 33717.62 32424.1 34915.8 0 20000 40000 60000 80000 100000 120000 j a n u a r y f e b r u a r y m a r c h a p r i l m a y j u n e dow jones ftse 100 nikkei 225 shanghai sensex https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 26 103,117 crore in addition to other aid packages, dsex dropped about 1 percent to 3960 in june. 8.2 percent gdp growth has been forecasted for the next fiscal year by the government despite the bad shape of the economy (tk 568,000 crore budget unveiled; 8.2pc gdp growth target set, 2020). objectives of the study this study followed the inductive approach to understand the effect of covid-19 on the stock markets in bangladesh. the specific objectives of the study are as follows:  to appraise the situation of bangladesh stock market during the pandemic.  to examine the role of regulatory authority for the development of the bangladesh stock market scope and methodology of the study the present study has been carried out to evaluate the performance of the bangladesh stock market during the pandemic. the analysis has been conducted mainly on data from secondary sources. to examine and evaluate the predominating impact on bangladesh stock markets, we have analyzed quantitative and qualitative data. the relevant data and information were collected from dhaka stock exchanges, chittagong stock exchange, stock markets reports, and bangladesh securities and exchange commission, different websites and published materials etc. in this article, we analyzed data from december 2019 to july 2020 of bangladesh stock markets. we have tried to assess the performance of the stock market through the measurements of variables such trading days and hours, number of security listing, all price share indices total trade-in value & volume, market capitalization, price earnings ratio, issues traded, and monthly turnover, circuit breakers, etc. the present paper is organized in the following manner. section one gives an introduction to the study. section two presents the literature survey of the recent pandemic, section three details the objectives, scope & methodology of the study. section four gives an overview of the bangladesh stock market during the pandemic, section five details the policy measures and their implication on the stock market; finally, six provides the conclusion and findings of the study. appraisal of bangladesh stock market during covid-19 trading days and hours the dhaka stock exchange (dse) and chittagong stock exchange have been closed since march 26 aligned with the government's general holiday aimed at stopping the widening coronavirus pandemic. bangladesh is the only country in the world where stock trading has remained closed for more than 3 months and resumed its operations from may 31, 2020. the total trading days in fy 2019-20 is 210 days seeing that the market remained closed for 66 days due to the pandemic. the regular trading hour for the capital market is from 10:30am to 2:30 pm, a four-hour trading session. by the terrible pandemic news across the globe, from march 19 , 2020, the trading time had been reduced by 1 hour, starting at 10:30am and continuing until 1:30 p.m. on march 19 , 2020, bangladesh securities and exchange commission (bsec) set an emergency circuit break on all listed stocks caused a three hours delay as trading started at https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 27 2:00pm until 2.30pm. as the frightening situation is spreading with the significant number of deaths and infections amid pandemic, bourses amended the trading hours from 10:00am to 1:00pm, rather than 10:30am to 1:30pm on june 18 to incorporate with the banking transaction hours. later on 8th july, after almost four months of interruption, both the stock exchanges reverted to the original full hours of the trading session starting from 10:30 am to 2:30 pm. number of security listing apart from all the bad news, the number of listings of securities has an upward trend. the number of listed securities data of dhaka stock exchange and chittagong stock exchange was reported at 590 units and 331 units accordingly in june 2020. these records are an increase from the previous year of 587 units and 323 units for dse and cse respectively. all price share indices in the pre-pandemic period, december 2019, dse broad index (dsex) went down by 1012.32 points from january 1st2019 and which is the lowest in 42 months since june 2016 and later settled at 4452.90. since the market crash in 2010-2011, 2019 was a complete nightmare for the stock market as the blue-chip index ds30 hit almost a 7 year low in the last month of this year. the port city’s bourse, chittagong stock exchange also saw a sharp fall with caspi plunging 2854 points to finish the year at 13505. in the pandemic period, on march 9, just a day after bangladesh confirmed 3 cases of covid-19, dsex, the benchmark index, shed 279 points, registering the biggest single-day fall since its inception in 2013. despite the investment made by banks in the stock market, the positive momentum failed to sustain as jittery investors dumped their shares. after setting the circuit breaker, dsex settled at 4008 points on march 25 by losing 10 percent over the past three months. meanwhile, the chittagong stock exchange also ended lower, with caspi settling 2177 points lower from december 2019 at 11328. after resuming the bourses, stocks had some downward trend but posted a modest gain in the last week of fy 201920 and closed at 3989.09 points. the chittagong stock exchange also ended marginally higher with caspi soaring 59 points to settle at 11321. figure 3. dhaka stock exchange broad index and chittagong stock exchange all share price index from december 2019 to june 2020. source: dse and cse websites. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 28 total trade-in value & volume the already deteriorating dhaka stock market’s month-end total trade was 144316 in december 2019 which declined by 81.3% due to concerns brought on by the corona-virus pandemic in march 2020 and again fell by 10% in june’s last day trading session. the total value of trading is higher in june than in march and december but the total volume is sinking after december. chittagong stock exchange also faced a similar market reaction as total trade was decreased by 77.6% in march than december whereas in june it has increased to 24223. the total value and total volume also rose in june after a panicky month of march. table 1. total trade, value, and volume of dhaka stock exchange and chittagong stock exchange during december 2019 and march and june 2020. month-end data dse cse dec’19 mar’20 jun’20 dec’19 mar’20 jun’20 total trade 144316 26949 24223 10300 2301 1648 total value (mn) 5216.489 3481.387 5557.152 275 11206449 64 22616545 54 total volume 242701500 53809765 53408903 9252000 3661203 8615602 source: dse and cse websites. market capitalization market capitalization at the country’s premier bourse has dropped by 8% from december 2019 to march 2020 to tk 3122.35 billion. the market lost tk 442 billion in seven straight sessions since the confirmation of the first corona-virus case on march 8. nevertheless, in june, the market cap slightly declined from march. the market cap of the port city bourse also ended lower in march than december but a sharp increase has been seen in june. figure 4: market capitalizations of dse and cse during december 2019, march, and june 2020. source: dse and cse websites. issues traded and monthly turnover stocks witnessed a downward trend throughout the year 2019 where on 23rd december 299 issues were traded in dse and cse, 68 issues were traded. despite the tension arising in the economic world due to the pandemic, upward trends in trading issues had noticed on the last day https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 29 of march’s trading session as 217 issues gained out of 338 in dse and 82 issues gained out of the 157 in cse. both in dse and cse of the issues traded most of them remained unchanged on 10 th june. the highest turnover during the pre-pandemic month of december is observed which is tk 67.03 billion in dse but in cse, the highest turnover is tk 9.53 billion in june 2020. table 2. issues traded on the bourses on december 2019, march, and june 2020. trading days dse cse ↑ ↓ ↔ ↑ ↓ ↔ 23 rd dec’2019 121 95 83 36 20 12 25 th mar’20 217 74 47 82 47 28 10 th jun’20 25 16 238 18 11 63 source: the financial express and the daily star. price earnings ratio (p/e ratio) the dse and cse had observed the lowest overall market price-earnings ratio as the stock market began to reflect the adverse impacts of the coronavirus pandemic. the overall market pe ratio, which is obtained by dividing the current market price by the earnings per share, came down from 11.80 (december 2019) to 10.58 in dse and from 16.27 (december 2019) to 10.56 in cse. both of the bourses had registered an increase in the last month of the fy 2019-20. figure 5. p/e ratio of dse and cse during the december 2019, march, and june 2020. source: report on “capital market development in bangladesh” by research department of bangladesh bank. circuit breaker the see-saw of the markets with worrying volatility urges the government to make a move to stabilize jittery markets, as traders panic sells out of fear. taking note of the uncontrolled market volatility amid the coronavirus fear, like many other countries, bangladesh securities and exchange commission imposed the market-wide circuit breaker and floor price for each stock on 19 th march to halt trade. under the new emergency circuit breaker rule, all listing security’s price will not go under the average closing price of five preceding days. the floor price of the day’s circuit breaker will be the opening adjusted price of a stock. the higher side of the circuit https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 30 breaker will be up to 10 percent high from the opening base price. many countries also took such intervention to boost the ailing capital market. despite the new circuit breaker imposed, many investors sold out their holdings amid mounting fear over coronavirus outbreak. later in the last week of the month, stocks rebounded strongly and yielded a positive outcome for both bourses. however, a section of market insiders demanded a withdrawal of floor prices as one of the consequences is the illiquid nature of the stock market. however, the floor price will be lifted once the pandemic situation becomes better. policy measures and its implication on the stock market we will discuss the actions taken by the government and the security regulators before lockdown when the coronavirus breakthrough started, and after lockdown including budget 21’s policy to rejuvenate the stock market. the stock market in bangladesh was already shrinking, however, as soon as the massive panic was created by covid-19, it is started to fall sharply albeit with the concrete effort of commercial bank investments. thereafter, government and stock market regulators took two steps within seven days span to stop the bleeding of this inefficient market. one of the attempts was introducing floor prices on individual scrip including block markets by the securities regulators. as soon as the regulators limit the share prices both indices have gained marginally which helped to revive the market after weeks of fall. although junk and overvalued stocks are gained mostly as they are also included under this newly imposed circuit breaker. junk stocks are those of the companies’ stocks that have failed to provide dividends, hold annual general meetings, or have shuttered their factories. another big attempt was taken by the stock exchange authorities of is that keeping the stock exchanges non-operational for more than 2 months, from 26 th march to 30 th may. the reason behind this closure was to confine the deadly virus from spreading among the stock market community. no wonder these steps were taken from the good heart of the regulators amid heightened precaution and virus fear but eventually these turn out to be bad policies for the country’s economy. many foreign as well as local investors criticized the dse and the bsec for the prolonged closure of trading and floor price. introducing the floor price generates huge confusion among the investors and professionals as this rule was quite unanticipated and unknown to them. many investors isolated themselves from investment to understand the new rule. one of the offset effects of the floor price regulation was the instant illiquid nature of the stock which reflects the broken stock market. most of the stocks are stuck at the same price repeatedly and only a few stocks are traded. to illustrate, on 17 june, only 37 shares changed value out of 269 shares and daily turnover was around 60 crore per day which was 400 crore per day before the floor price was implemented. on june 14 th , due to several protests against the floor price rule, it was lifted from the block market which benefits big investors but creates dual pricing which hurts the market. as for the small investors, the previous rule will sustain which drives these companies to starve, and soon to close operations. stock exchanges of bangladesh have remained closed for a significant time frame when no other stock exchanges in the world were closed for that long period. as days pass, the world came to realize that without the vaccine, this pandemic situation will not be over. so, to facilitate https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 31 the economic movement, almost every country reopened the stock market as closing the stock market will bring more detrimental effects. in both bourses, around 2.6 million bo account holders have invested their money which is immobilized because of this prolonged lockdown. their fund should be readily available as many lost their jobs or might need for supporting themselves. another tragic fact is, some investors bought stocks upon taking loans which interest they will have to pay albeit stocks were not performing. since bourses were closed, they could not sell-off their shares, besides, are compelled to pay interest which is 12-18 percent annually. after taking over in may, the new bangladesh securities and exchange commission (bsec) committee hold several meetings and took various initiatives along with the ministry of finance, bangladesh bank, and the nbr to bring back investors and entrepreneurs and to regain their confidence as there is no alternative to the revival of the stock market to accelerate the economy. one of the initiatives was bangladesh bank announced a special package that would allow banks to form a tk 200 crore-fund by taking financial support from the central bank for investing in the stock market. another point worth noting is, the stock market regulator further ordered the listed companies and their board of directors to comply with the directives regarding holding a minimum of 30 percent shares jointly by the directors, other than independent ones, within 60 working days from july 29, 2020. these actions might bring some good vibe by rebounding the market and with more investment from foreign and local investors. government initiatives for the development of the stock market have appeared in the proposed budget for fiscal year (fy) 2020-21 which is welcomed by prime bourse as wellplanned and business-friendly and in favor of the general investors' expectations. to restore and to bring potency in the stock market, the government has taken six short and long-term maneuvers in the budget. investment of undisclosed money in the capital market by paying ten percent on such investment, subject to the lock-in period of three years. investing undisclosed money in the stock market will be a positive scope for the investors as well as an increased flow of funds will leave a positive impact on the capital market. furthermore, it was a demand made by many market intermediaries for a long period. however, stock market experts stressed that the provision would not bring any good to the stock market as no one would want to keep their investments under lock-in for three years as the government permitted investing in all financial schemes and instruments like cash, bank deposits, and saving certificates and there was no lock-in condition. moreover, bank deposits and other financial instruments will be more reliable and favorable for investment than the stock market. in the proposed budget for the financial year 2020-21, a tax incentive has been furnished to motivate the stock market and is hailed by dse. declaration of cash dividend instead of stock dividend has been made obligatory which is at least 50 percent of the profit of listed companies. another policy is taken that is tax-free dividend income up to tk. 50,000 will remain persistent in the stock market. in the proposed budget, corporate tax has been reduced from 35 percent to 32.5 percent on non-listed companies other than banks, insurance companies, financial institutions, and mobile companies without changing the tax rate for the listed companies which essentially reduce the tax gap between listed and non-listed securities (other than financial institutions, https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 32 telecom, and tobacco) to 7.5% instead of existing 10%. the corporate tax on non-listed companies has been deducted so that these companies can get through the dire challenges faced by the country’s economy due to the pandemic and also assist them in boosting the bottom-line. however, some share market participants believe that keeping the corporate tax unchanged for listed companies while reducing for non-listed companies will bring no good for the stock market. cutting the corporate tax on the listed companies has been demanded by market operators for a long time which will minimize the tax burden, in addition, to encourage nonlisted well-performing companies to get listed in the stock market, but yet the government did the opposite which might discourage profitable businesses hold off from the capital market. . nonetheless, the stakeholders reiterate that they will request to lower corporate tax for listed companies. several significant proposals requested by the bangladesh securities and exchange commission (bsec) have gone unaddressed in this proposed budget such as reduction of capital gains tax for institutional investors and an incentive for corporations preferring bonds to bank loans. conclusion the uncertainty of living due to the gravest threat of feared disease jeopardizing the world’s overall economy as well as the global stock market.in the pandemic situation, taking on nontherapeutic precautionary means, such as, travel bans, remote working, to maintain social distancing which is quite cumbersome from the perspective of bangladesh,has driven economic depression inescapable. since the corona-virus vaccine will not come any time soon, it’s become a challenge for the government to maintain the health of the nation and overcome economic disparity simultaneously. this research has intendant to explore the contrast between the before the pandemic and during pandemic’s immediate effect of covid-19 on the stock markets of bangladesh. also, our study attempts to reveal the efficacy of the government’s initiatives and its negative aspect towards some investors. we aimed to lay out the interpretation of government responses to covid-19 and its aftermath to the investors and the stock market itself. 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(2020, june 11). the daily star. retrieved from https://www.thedailystar.net/tk-568000-crore-budget-2020-21unveiled-8.2pc-gdp-growth-target-set-1912729 why is bangladesh’s stock market bearish when global stocks are on bull run? (2020, june 18). the daily star. retrieved from https://www.thedailystar.net/business/news/whybangladeshs-stock-market-bearish-when-global-stocks-are-bull-run-1916441 worldometer. (2020, august 11). retrieved from https://www.worldometers.info/coronavirus/country/bangladesh/ copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) copyright © cc-by-nc 2020, cribfb | asfbr asian finance & banking review; vol. 4, no. 1; 2020 issn 2576-1161 e-issn 2576-1188 published by centre for research on islamic banking & finance and business, usa 47 embezzlement and reckless spending: a bottleneck for local governments’ revitalization and sustainable development in nigeria shafi’u abubakar kurfi department of accounting umaru musa yar’adua university, katsina state, nigeria e-mail: abubakarkurfishafiu@gmail.com moh’d lawal danrimi department of accounting umaru musa yar’adua university, katsina state, nigeria abstract nigeria operates a federal system of government and power is allocated to federal, state and local governments. a collaborative effort was encouraged to promote socio-economic development. unfortunately, lack of diversification of the economy and over concentration on crude oil, it now operates a monolithic economy. federal government on monthly basis share the proceed to the three levels of government but ironically, nothing significant is shown for the huge allocations due to uncontrollable embezzlement and reckless spending by public servants more specifically local authorities due to the extreme closeness to citizenry. documentary data were obtained from published books, reputable journals, government publications, magazines, newspaper publications, internet sources and personal observations in carrying out this study. the paper observed that embezzlement and reckless spending is on the increase in some nigerian local governments and is manifested through the state joint local government account, embezzlements and reckless spending by local chairmen, fake projects, collusion in the transaction of government businesses, ghost workers, denial of statutory functions. the paper concludes that local government is at the verge of total collapse if adequate measures were not taken to savage the situation. the paper recommends that states joint accounts should be scrap for local governments have a sustainable development. keywords: local government, embezzlement, reckless spending, sustainable development. 1. introduction nigeria operates a federal system of government and powers are shared among the component units. this is indicative that local government is the third tier of government and is expected to be autonomous in the discharge of its duties. this was the essence of the various reforms at the grassroots governance, especially, the 1976 local government reform that among others recognised the council as a third tier of government and with powers to execute certain functions (nwaodike, 2016). however, after many years of experimenting with the local government system, scholars have expressed concern over the parlous state of local councils in nigeria and the apparent disconnect between it and the lives of the people. therefore, if anyone is to examine the reasons for nigeria’s underdevelopment and the state of the nation, one should visit the local councils (fatile & okewale, 2014). consequently, the councils have failed to deliver in its responsibilities. this non-performance can be traced to many factors such as corrupt practices which include embezzlements and reckless of treasuries, lack of local autonomy, and lack of qualified personnel/manpower among others. recently, there are so many allegations that state governments have consistently interfered on the political, financial and administrative functions of the councils and have created a master-servant relationship between the state and the local government which also lead to embezzlements and reckless spending in local governments in nigeria (adeyemi, 2012). local government system in nigeria witnessed abysmal failure. it is on record that at no time in the history of the country has there been the current level of funding accruing to the local governments from the federal, yet the hope for rapid and sustained development has been a mirage as successive councils have grossly under-performed in their assigned responsibilities. this observation shows among others that local governments have produced exactly opposite the original objectives for their creation. ukiwo (2006) maintained that, instead of bringing government and development closer to the people, local governments have produced absentee local government chairmen who are seen at council headquarters when the monthly ‘abuja allocations’ arrives copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 48 and vamoose with their standby jeeps and mobile police escorts after superintending over the sharing of the local governments share of the national cake among relevant stakeholder. the nigeria state is characterized by prebendalism. this is a situation where public office is held first, for the interest of the officer and second, for the interest of the public. this situation has greatly encouraged embezzlements at every level of government in nigeria. embezzlement mean to steal, misdirect or misappropriate funds or assets placed in one’s trust or under one’s control. from a legal point of view, embezzlement need not necessarily be or involve corruption . an example of embezzlements at local government is using local government fund to finance political parties. izueke (2010) observed that collusion is also a powerful tool of embezzlements and reckless spending. collusion is an arrangement between two or more parties designed to achieve an improper purpose, including influencing improperly the actions of another party. he identified the following forms of collusion that are common to the local government system in nigeria and served as bottleneck for local governments’ revitalization for sustainable development from the grass root. this collusion includes: ▪ collusion between supervisory ministries and local government chairmen; ▪ collusion with citizen who benefit from the thieving public officers; ▪ collusion with contractors to inflate contract prices or quotation. therefore, the main aim of this paper is to identify how embezzlement and reckless spending become a bottleneck for local governments’ revitalization for sustainable development. in this paper, local government and local councils are used interchangeably. 2. local government, embezzlements and reckless spending according to the united nations division of public administration, local government is a political division of a nation, which is constituted by law and has substantial control of local affairs including the powers to impose taxes or exert labour for prescribed purposes. local government is government at the local level created to decongest the functions and burden of the other tiers of government, bring about democratic climate of opinion; provide valuable political education, provide two-way communication; and ensure even and rapid development (nwaodike, 2013). it is usually created by a law of the state in a federal system of government and the law of the central government in a unitary state and given adequate power and autonomy to discharge the functions assigned to it. the governing body of such an entity is elected or otherwise locally selected (el-rufai 2012). this means that local government is a legally constituted body created for the grassroots level purely for developmental purpose (olojede, fajonyomi & fatile 2011). ezeani (2004), also view local government generally as veritable agent of development and grassroots participation in the democratic process. the 1999 constitution of the federal republic of nigeria recognizes the local government as a legal rational entity. section 7 says: “the system of local government by democratically elected local government councils is under this constitution guaranteed; and accordingly, the government of every state shall, subject to section 8 of this constitution, ensure their existence under a law which provides for the establishment, structure, composition, finance, and functions, of such councils”. these definitions have basic features which include elective representatives, constitutionally recognised functions and powers to recruit personnel and generate revenue so as to execute its programmes (nwaodike, 2013). oviasuyi, idada & isiraojie, (2010) maintained that the constitution goes further to establish the function of the local government in its fourth schedule of both the 1979 and 1999 constitutions of the federal republic of nigeria, the basic functions, which all local governments in nigeria are established to perform, revolve around the following: ▪ functions in which success depends on communities’ responsiveness and participation; ▪ functions which require detailed local knowledge for efficient performance ▪ functions which are of a personal nature requiring provision close to where the individuals affected live; and ▪ functions in which significant use of discretion or understanding of individuals are needed. similarly, nwadike, (2016); oviasuyi, et al. (2010) spelt out other functions of local government administration as follows: ▪ the local government is authorized to consider and submit to a state commission or any other body on economic and social development as it affects the locality; ▪ the economic functions of local government enable the authority to raise money through investments, taxes and other forms of levies; ▪ the social and welfare functions of local government direct the authority towards the provision of such services as education, health, roads, and recreation grounds, etc, ▪ local government administration also carries out informative functions such as enlightenment, development projects, administration, democratic and leadership initiative and maintenance of peace, law and order in the locality which may include: ▪ inspection of meat and abattoirs; ▪ provision of nursery, primary and adult education; copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 49 ▪ provision of scholarship and bursaries award; ▪ provision of public libraries and reading rooms; ▪ agricultural and animal health extension services and veterinary clinics, fire services; ▪ lighting and drainage; ▪ support for arts and culture; ▪ control of pollution; ▪ control of beggars and prostitution; ▪ homes for destitute, the insane and orphans; ▪ public housing programmes; ▪ regulation and control of buildings; ▪ town and country planning; ▪ operations of commercial undertakings; ▪ control of traffic and parking; ▪ pipe sewage systems. however, most local governments in nigeria have been unable to fulfil their obligations at the grassroots due to excessive external control from the states which impliedly lead to excessive embezzlements and reckless spending which is also bottleneck for local governments’ revitalization for sustainable development. embezzlement is seen as a white-collar crime and its effect is felt by all tiers of government. the federal bureau of investigation (fbi) defined embezzlement as, the illegal misuse or misapplication by a criminal to his/her individual benefit such as money, property, or some other thing of value entrusted to his/her care, custody or control. edori (2018) included embezzlement as part of financial crimes in his list of financial crimes. it is an offense that occurs when an individual deliberately use assets and/or money for a purpose which it was not intended. according to the national white-collar crime centre (nw3c) what differentiates embezzlement from other types of theft is the breach of financial trust between the property or money owner and the offender. they further explained that, embezzlement, technically, are a type of larceny and as a result does not enjoy a class of its own in the uniform crime reports so measurement of its number of occurrences is a bit difficult and may vary from source to source.” embezzlement is normally committed by employees that are entrusted with money or asset. bartz, strock & harris (2017) confirm that every organization both big and small, private and public is prone to embezzlement, they suggested different ways of preventing embezzlement such as segregation of duties and meticulous check of every transaction whether big or small. ibanichuka & onuoha (2012) maintained that embezzlement is an intentional misuse of money, physical assets or trust. the appropriation of money and other assets meant for a specific purpose for either personal use or for what it is not meant for. such act is an unauthorized disbursement of money or other assets for personal gain. embezzlement is the highest type of fraud in the public sector. people deliberately convert public fund to personal use without a blink of fear or conscience disturbance the effect of embezzlement, reckless spending or any fraud is a bottleneck for local governments’ revitalization for sustainable development and always unpleasant. financial misappropriation or embezzlements in form of government has very negative effects as gathered by kiabel (2002). most embezzlement cases have serious socio-economic effects in the local authorities. it always results in loss of fund and assets of the local governments and has an adverse effect for revitalizing sustainable development. the loss of liquid assets will further lead to the reduction of revenue for current and capital expenditures, with the attendant reduction in the level of economic operations, reduction in revenue inflow and provision of socio-economic infrastructure for the public. udoayang & james (2004) spelt out this type of unethical behaviour is committed by the following means: ▪ outright taking away of government assets for personal use ▪ payment of salary for non-workers ▪ payment for fictitious purchase and contract ▪ payment for no return inwards ▪ teeming and landing ▪ manipulation of any form for personal gains ▪ over-stating of the contract price ▪ conversion of government money into personal use ▪ conversion of office imprest to the personal allowance ▪ unauthorized use of public funds or asset ▪ payment against uncleared cheques ▪ the claim of disease staff gratuity and pension benefits ▪ misuse of medical allowances and reimbursements ▪ larceny copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 50 ▪ cheque fraud and some fraudulent behaviour may include cutting costs and manipulating financial records for personal needs, etc. 3. trends of embezzlements, reckless spending and its implications on local government administration aluko (2006) maintained that the local government reform of 1976 listed a single tier multi-purpose local government and ever since then, nigeria as a country has adopted this form of local government administration. the implication of the above is that a similar method of corrupt practices is obtainable virtually in all the local councils in the country. the trends of embezzlements and reckless spending in nigeria can be summarized as follows: 3.1 council chairmen newswatch (2001) reported that in every state of the federation, council chairmen and other top local government officials have been accused of embezzlement, misappropriation of funds, extra-budgetary spending, purchase of official vehicles (sometimes unnecessarily) at unreasonably exorbitant prices, and outrageous expenditure on security. for example, in 2004 alone punch (2004) reported that more than n38.04 billion as statutory allocation was disbursed to the 774 local governments in nigeria; the question is what has really come of the huge amount? the simple answer is that it has given room for extravagant lifestyle on the part of the local council officials at the expense of the provision of essential basic socio-economic and infrastructural facilities for the local inhabitants. newswatch (2001 quoted in aluko, 2006) reported that the chairman of kachia local government area awarded a contract of n2.5 million for rehabilitation and completion of a women’s centre but no work was done; he spent n 1, 913,990.00 on a rural electrification project, instead of the approved budget of n 1, 385,540.00, the report further stated that the chairman of sabon gari lga council ignored the provisions of the financial memorandum and gave each of his councillors n 150,000.00 for loyalty; he spent n1million as touring allowance for the month of august 2000 alone; and spent another n 1.5 million on radio communication equipment. the same report had it that the extra-budgetary spending of the samga local government chairman stood at n 16,495,605.70; he even awarded a contract for office rehabilitation worth n 3,171,375.00 when the value of the said office rehabilitation ought to be n 906,044.00. similarly, ogun state local government cannot claim to be free from similar corrupt cases, on june 13, 2010, sunday punch reported a case captioned “n 30bn fraud: efcc storms ogun”. in that report, former chairmen of ikenne local government, chief adepegba otemolu and obafemi owode local government, mr akeem adesina were among the chairmen being investigated over the alleged diversion of n30bn excess crude oil allocated to the 20 local government areas of the state in 2009. adeyemi (2012) revealed that the former council chairman of abeokuta north local government council in ogun state, alhaji morouf ajisegun was convicted and sentence to two years imprisonment with the option of n500, 000.00 fine for lavishing the sum of n260, 000.00 meant for printing of exercise books in the local government on ileya gift. fatile and okewale (2014) also revealed that in benue state, the chairman of ado lga was reported to have spent thirty-eight million two hundred (n 38, 200,000.00) on maintenance of peace in the area where there was no crisis in the area since the chairman assumed office. the chairman also claimed to have spent eighteen million (n 18,000,000) on hospitality, the only lg chairman in the country to have done so. also, in delta state, the chairman of okpe lga was suspended by the, state house of assembly on the allegation that he claimed have given n86 million to niger delta youths guarding pipeline installations. the chairman was further accused of mismanaging four hundred million (n 400,000.00) stabilization fund using his position to acquired 40 cars for himself and members of his family. the above explanations and illustrations are few practical examples of embezzlement and reckless spending in local government councils in nigeria. the consequence is a bottleneck for local governments’ revitalization for sustainable development while the officials of the councils are busy celebrating their ill-gotten wealth. 3.2 ghost workers another trend of embezzlement and reckless spending in local government councils in nigeria is ghost workers. the number of workers on the pay roll of the council is much more than the legitimate number of workers actually working in the council. sometimes these ghost workers are regarded as consultants, liaison officers etc. in fact, some of these names do not exist in actual sense, that is, council officials only add such fictitious names and the money meant for such ghost names will finally find their way or be transferred to these officials account. some ghost workers in some states are illegal names given by political office holders comprising their supporters who are not working but collecting wages/salaries from the local governments (nwaodike, 2013), this illicit act is a bottle necks for local governments’ revitalization for sustainable development. 3.3 fake projects nwaodike, (2013) revealed that besides the aforementioned forms of embezzlement and reckless spending practices, others come in the form of fake projects as part of the ongoing developmental projects the councils claim to have embarked on. these unidentified projects include, drainage systems, lockup shops, construction of new and renovation of the existing ones respectively, copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 51 agricultural projects like poultry farms, health centres for their staffs, etc. the council normally adds these projects as part of their achievement for the year but in real sense, such hardly exist. hence, allocations meant for the budgeted projects are distributed among the local government officials to the detriment of the local people. besides these, the councils have the habit of disbursing illegal funds to party leaders within the local government 4. state joint local government account and its implications on local government administration recently, there are allegations that state governments have consistently interfered on the political, financial and administrative functions of the councils and have created a master-servant relationship between the state and the local government (nwaodike, 2013). the councils have not only become an appendage of the states, but the latter have also gone further to create a joint allocation account committee (jaac) through their state houses of assembly to facilitate section 162 (6, 7 and 8) of the 1999 constitution as amended. this section created state joint local government account where federal/ statutory allocation between states and local governments are made. monies statutorily allocated to the councils were alleged to have been siphoned by the chief executives of the states. this act has rendered the local government incapacitated especially in executing their assigned functions due to lack of funds. therefore, a local government has become a shadow of themselves. aside the denial and starvation of monies meant for the local governments, there are illegal and sundry deductions from joint allocation account committee by the state government. it is on record that state governments deduct primary school teachers’ salaries and allowances which are first line charges and they do not go into the state government purse. however, there are other deductions made from the state joint local government account. the percentage may look like stipends, but it amounts into millions of naira on monthly basis. these among others include: ▪ 1% training fund for local government service commission ▪ 4% for the traditional rulers (traditional council) ▪ 7.5% for employer contributions (contributory pension/ncps) ▪ 5% redemption bond ▪ 15% primary school teacher‟ pension ▪ maintenance of ministry of local government and chieftaincy affairs ▪ contribution to subeb ▪ 0.5% life insurance premium ▪ 1% audit fees ▪ 15% local government staff funds as a result of the above deductions, outright scrapping of the account was considered due to following reasons: ▪ inability of the local government to carry out developmental projects at the grassroots. ▪ irregular and times, non-payment of salaries and allowances of the local government functionaries ▪ to allow local governments to have financial and administrative autonomy ▪ to allow the existing local governments to function effectively in their duties ▪ to limit the overbearing influence from the state government ▪ to reduce unnecessary deductions from the local government account by the state government. ▪ to allow even distribution of dividends of democracy. ▪ to allow the elected political officers fulfil their promises to the masses in the local government area. ▪ it makes the local government to be at the mercy of the state government by going all about cap-in-hand begging for funds. ▪ to put an end to illegal deductions from the local government funds. ▪ to put a stop to the delay in the remittance of local government funds. ▪ to put a stop to unnecessary interference in local government affairs. ▪ for the harmonisation of local government funds. state joint local government account denied local authorities to access full finance that help them to revitalize for sustainable development, thus, there is dire need to curb the above bottle necks by scrapping the joint account. 5. conclusion it is obvious that most local government authorities are not functional enough to meet the need of its citizenry. with the exception of few local governments in the country, others are mere shadow of themselves. in terms of meeting their core mandate they have been largely ineffective and inefficient. this explains why after many years of comprehensive and democratically minded local government reform of 1976, little social dividends can be found in most local government. there is no doubt that the high rate of embezzlements and reckless spending in the local government has great negative implications. it is rather unfortunate that the citizens that are supposed to enjoy the benefits of these existing of local governments are rather subjected to all forms of ridicule copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 52 and frustration by increasing insecurity, contagious disease, starvation to mention but a few in our local governments, thus, embezzlement and reckless spending serve as bottleneck for local governments’ revitalization for sustainable development. 6. recommendations the following recommendations are some of the probable solutions to this scourge of fraud: ▪ declaration of assets by the chief executive officer (chairman) before assumption of office, and on leaving the office ▪ establishment of vibrant project monitoring team from the state to monitor the pace of development in the local government area ▪ establishment of an audit panel by the state to audit funds collected by the council in every six months ▪ prosecution and conviction of persons found wanting. government should go beyond the mere pronouncement of anti-corruption policies. it should rather provide good governance and an enabling environment for democratic ideals to thrive. ▪ racing, seizing and confiscating all proceeds of crime ▪ introducing or launching national reorientation programmes to educate people on the negative impacts and the need to eradicate corruption in all facets of nigerian's public life ▪ the government must introduce an equitable wages and incentive system and improve other conditions of work so that the level of poverty could be reduced and the quality of life improved ▪ state joint local government account in nigeria should be scrapped ▪ financial crime regulatory institutions should conclude all the outstanding financial fraud cases on the past local governments bosses that are all over the courts in nigeria. this would help to some extent serve as a guide to upcoming politicians whom would be at the helms of affairs. ▪ finally, there is the need for the provision of adequate resources anti-corruption agencies and non-interference of government on the mandate given to the anti –corruption agencies so as to make them effective. references adeyemi, o. o. (2012). corruption and local government administration in nigeria: a discourse of core issues. european journal of sustainable development, 1(2), 183-183. aluko, j. o. (2006). corruption in the local government system in nigeria. bookbuilders-editions africa. aluko, j.o. (2007). the dynamics of local government administration. abuja: bluesland communication limited. bartz, f., strock, b., & harris, j. d. (2017). embezzlement: are you at risk? cavill, s., & sohail, m. (2007) accountability arrangement to combat corruption water, engineering and development centre lougborough university lekestershire uk duruji, m. m., & azuh, d. e. (2013). the politics and sociology of corruption in nigeria's fourth republic. ansu. lou mal of pence ajui development studies, 1(2), 65-86. simeon, e. d. s. e. i. (2018). auditing and fraud control in corporate organisations. auditing, 9(8), 190-196. el-rufai, n. a. (2012). local government: the missing tier of government. columnist (internet material downloaded feb 10, 2014). ezeani, o. e. (2004). local government administration zik-chuks enugu fatile, j. o., & okewale, r. a. (2014). corruption and democracy in nigerian local government. review of public administration and management, 1(3), 140-155. izueke, e. m. (2010). local government and good governance in nigeria. (internet material downloaded feb 13, 2014.) islam, k. m. a., & barghouthi, o. a. (2017). corporate governance: an islamic institution perspective. international journal of islamic banking and finance research, 1(1), 29-32. https://doi.org/10.46281/ijibfr.v1i1.36 islam, k. m. a., & karim miajee, m. r. (2017). an islamic perspective of leadership. international journal of islamic business & management, 1(1), 14-16. https://doi.org/10.46281/ijibm.v1i1.47 islam, k. a., & bhuiyan, a. b. (2019). the theoretical linkages between the shariah supervisory board (ssb) and stakeholder theory in the islamic financial institutes: an empirical review. international journal of accounting & finance review, 4(2), 43-49. https://doi.org/10.46281/ijafr.v4i2.436 kiabel, b. d. (2002). auditing: basic principles. owerri: springfield publishers. newswatch, (2001). looting of local government. lagos, 33(25), 54-63. nwaodike, c. (2016). corrupt practices in nigeria’s local government: a critical perspective. iosr journal of humanities and social, 21(9), 6-11. nwaodike, c. a. (2013). local government autonomy and grassroot democracy in ogun state, nigeria (1999-2012). a ph.d thesis submitted in the department of political science and public administration, babcock business school, in copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 53 fulfilment of the requirements for the award of the degree of doctor of philosophy in political science, babcock university, ilishan-remo, ogun state, nigeria. olojede, i., fajonyomi, s. b., & fatile, j. (eds.). (2011). contemporary issues in local government administration in nigeria. rakson nigeria (educational publishers). oviasuyi, p.o., idada, w., & isiraojie, l. (2010). constraints of local government in nigeria. journal of social science, 24(2), 81-86. udoayang, i. o. and james, f. u. (2004). auditing & investigation. calabar.university of calabar press. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). copyright © cc-by-nc 2019, cribfb | afbr asian finance & banking review; vol. 3, no. 1; 2019 issn 2576-1161 e-issn 2576-1188 research article published by centre for research on islamic banking & finance and business, usa 74 inflation targeting in iran bijan bidabad 1 nahid kalbasi anaraki 2 abstract inflation targeting in various forms has been adopted by a number of countries as a framework for making monetary policy more coherent and transparent and for increasing the credibility of monetary policy. despite the language, referring to inflation target as the primary objective of monetary policy, central bankers always make room for short-run stabilization objectives, particularly with respect to output and exchange rate. inflation targeting, in most cases, reduces the role of intermediate targets, such as exchange rate or money growth rate. experience of other countries that have adopted inflation targeting as a monetary framework reveals that the success of the policy depends on not only the transparency of the operation but also on the budgetary discipline. indeed, the central banks that have become more transparent, more independent, more coherent, and more accountable and more credible have been more successful. the controversy among economists on the expenses of inflation targeting has attained particular attention during the past decades .while opponents believe that inflation targeting takes place at the expense of output shortfalls (cechetti and ehrmann 1999), proponents (mishkin 2000, jonas and mishkin 2003) believe that inflation targeting promotes investment and economic growth. this paper tries to address the question of whether the performance of inflation targeting in iran has been successful. based on a monetary model, using exogenous variables such as official exchange rate, budget deficit, foreign exchange obligation account, and balance of payments, the results suggest that the effects of inflation targeting on the real output is trivial, supporting the natural rate hypothesis. keywords: inflation targeting, macro-econometric model, monetary policy 1. introduction indeed, the unhappy experience of the latin america and east asian countries with pegged exchange rate regimes who subsequently found themselves in deep financial crisis in the late 1990s has induced other countries to search for alternative nominal anchors. the emergence of inflation targeting over the past decade has been seen as a development in the approach of central banks to the conduct of monetary policy. after the adoption by new zealand in 1990, inflation targeting has been the choice of a growing number of central banks in industrial and emerging economies, including canada, brazil, chile, the czech republic, poland, sweden, and the u.k. inflation targeting is a monetary policy strategy that encompasses five main elements: (i) the public announcement of the medium-term numerical target for inflation (ii) an institutional commitment for price stability (iii) an information inclusive strategy in which, many variables, and not just monetary aggregates or the exchange rate are used for deciding the set of policy instruments (iv) increased transparency of the monetary policy strategy through communication with the public and the markets about the objectives, and decisions, (v) increased accountability of the central bank for attaining its inflation objectives. inflation targeting proponents cite many benefits to this policy, including solving the dynamic inconsistency problem that produces a high inflation rate and reducing inflation variability. inflation targeting has also the key advantage that is easily understood by the public and thus is highly transparent. and last but not least, if flexible, it helps to stabilize output as well. 1 (b.a., m.sc., ph.d., post-doc.) research professor of economics, monetary and banking research academy, bidabad@yahoo.com bijan@bidabad.com http://www.bidabad.com . 2 nahid kalbasi anaraki, faculty member, monetary and banking research academy, e-mail: nkalbasi@aol.com mailto:bidabad@yahoo.com http://www.bidabad.com/ mailto:nkalbasi@aol.com copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 75 critics of inflation targeting have noted major disadvantages: (i) inflation targeting is too rigid (ii) it allows too much discretion (iii) it has the potential to increase output instability (iv) it will lower economic growth (v) it produces weak central bank accountability because inflation is hard to control and because there are long lags from the monetary policy instruments to the inflation outcome (vi) exchange rate flexibility required by inflation targeting might cause financial instability, (vii) and finally, it may not be sufficient to ensure fiscal discipline or prevent fiscal dominance. indeed, a relatively long list of requirements should be met if the inflation targeting is to operate successfully. these requirements include: (i) a strong fiscal position (ii) a well understood transmission mechanism between monetary policy instruments and inflation (iii) a well developed financial system (iv) a clear mandate for price stability (v) absence of other nominal anchors than inflation (vi) transparency and accountability of monetary policy. indeed, it is not possible to say whether a country meets these requirements or not: it is more a question of the degree to which these preconditions are met. one decade of inflation targeting in the world offers useful lessons on the design and implementation of this framework. since the iranian economy has started to adopt inflation targets in the medium-term through the five year development plans since 1989, this paper tries to investigate the feasibility of the targets within a monetary model. moreover, it tests the hypothesis a trade-off between inflation targeting and real output. in the next section, we review the performance of countries that have adopted inflation targeting. section iii is allocated to the inflation targeting and monetary policy instruments in iran. section iv presents the estimated results of a monetary model, measuring the trade-off between inflation and real output. and finally, the last section rap up and concludes. 2. experience of other countries in this section, we try to investigate the success of reducing inflation in some countries which adopted this policy. moreover, we will investigate whether the reduction in inflation rate has occurred at the cost of real output reduction. cechetti and ehrmann (1999) chose 23 countries where 9 have performed some targeting for reducing inflation. they show that for the latter group inflation fell by more than 7 percentage points on average, from 10.82 percent in the late 1980s to 3.41 percent in the late 1990s, whereas for the non-targeted the average reduction amounts to 3.6 percent. indeed, inflation targeting has achieved its primary objective of lowering inflation. moreover, the output and inflation statistics support the view that inflation targeters have reduced inflation at the expense of an increase in output volatility. indeed, the outcome depends on many issues, including a country's economic structure, its policy regime, and the actual pattern of shocks it has faced.3 in another study, frederic s. mishkin (2000) investigates inflation targeting in an emerging economy, chile. before embarking the inflation targeting, passed new central bank legislation in 1989, which gave independence to the central bank and mandated price stability as one of its primary objectives. chile's central bank pursued a very gradualist approach to lowering its inflation objectives. the chilean experience was quite successful. inflation fell from about 20% in 1991 to around 3.5% in 2000. over the same period, output growth was very high, averaging more than 8 percent per year. chile experienced that inflation targeting can be used as a successful strategy for gradual disinflation in emerging market countries, even when initial inflation is around 20%. it is important to notice that inflation targeting cannot be solely attributed to the actions of the central bank, supervision policies, such as the absence of fiscal deficits and supervision of the financial sector have been crucial to its success. jonas and mishkin (2003) in their paper "inflation targeting in transition countries: experiences and prospects" examine the inflation targeting experience in three transition economies of the czech republic, poland, and hungary. a key lesson from the experience of inflation targeting in transition countries is that their economic performance has been improved. all these countries have an independent central bank with a clear mandate to pursue price stability. there has also been significant progress in making more transparent monetary policy decision and more accountable central banks. financial markets are relatively well developed, allowing for reasonably effective transmission mechanism between monetary policy instruments and inflation. with respect to fiscal position, fiscal deficits have widened significantly, particularly in the czech republic and hungary. however, these deficits have not yet posed direct problems to inflation targeting in the sense of fiscal 3 -cecchetti s. and m. ehrmann "does inflation targeting increase output volatility? an international comparison of policy makers' preferences and outcomes", nber working paper 7426, dec 1999. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 76 dominance of monetary policy because they have been financed by non-monetary means. moreover, these countries have a regime of managed float, and inflation is the only nominal anchor in the economy. the experience of these transition countries shows that all three countries are preceding well with disinflation and there is a good chance that in a few years, they should be able to reach price stability. however, the process of disinflation is not a smooth one. in this respect, one should bear in mind that countries could be quite successful in the longer term in bringing inflation down, but if a successful disinflation is accompanied by significant instability of inflation, this could be costly for the economy as well. there is not yet much we can say about the history of inflation targeting in hungary because it is so recent. the 2001 target was announced only in august 2001, and it, therefore, was more a short-term inflation forecast than an actual inflation target. table (1) presents the history of inflation targeting in the czech republic and poland, telling a different story. as it is seen in the above table, in the czech republic, the central bank undershot her inflation target, particularly in 1998 and 1999. only in 2001 the central bank succeeded in achieving her inflation targeting but undershot its target again in 2002. in poland, there was an opposite problem since the national bank of poland (nbp) overshot her target in 1999 and 2000. very tight monetary policy and slowing economic activity helped to bring inflation down sharply in 2001, and subsequently, the 2001 and 2002 targets were undershot quite sizable. these deviations may seem to suggest that inflation targeting was not very successful in the czech republic and poland. table (1). targeted and actual inflation in the czech republic and poland country czech republic (inf) czech republic (inf) poland (inf) poland (inf) year target actual target actual 1998 5.5-6.5 1.7 x 8.6 1999 4-5 1.5 6.4-7.8 9.8 2000 3.5-5.5 3 5.4-6.8 8.5 2001 2-4 2.4 6-8 3.6 2002 2.75-4.75 0.5 4-6 0.8 source: jonas and mishkin, "inflation targeting in transition countries: experience and prospects", nber, working paper 9667, april 2003, p23. before making any definitive judgment about the success or failure of inflation targeting, it is important to understand the reasons for such significant deviations from targeted inflation. we have to examine more closely the domestic and external economic circumstances that have prevailed during this period and have affected the actual inflation. at the time that czech central bank launched inflation targeting, inflation was rising quite rapidly, but at the same time, the economy was slipping into a prolonged recession. the 1998 and 2000 targets were specified at that time when the central bank, public and private forecasters expected much stronger economic growth than what actually occurred. however, in 1998-99 with the onset of a major banking crisis in 1997-98, economic activity fell down and contributed to a much faster disinflation than envisaged by the central bank. moreover, in 1997-98, weak global economic activity contributed to falling commodity prices, including energy prices. the central bank calculations suggest that these external factors had a sizeable effect on net inflation; for instance, in 1998, these factors reduced the inflation by 2-3 percentage points. like in the czech republic, inflation in poland had declined significantly during 1998 and 1999, but this decline was less dramatic. the relatively rapid economic growth of domestic demand, increase in import prices, and monopolistic structure of some industries resulted in a reversal of disinflation in poland in 1999. fiscal policy was also much more expansionary than the national bank of poland (nbp) had expected, and this expansionary stance further fueled domestic demand. the nbp responded to these developments by significant tightening of the monetary policy, and it continued to keep monetary conditions very tight even when inflation began to fall sharply later in 2000 and 2001. indeed, the nbp tried to use a tight monetary policy stance as an instrument to force the government to strengthen the structural fiscal balance, even at the cost of significant undershooting of its inflation target. judging from the success point of view in meeting its inflation target, the nbp has not been very successful, thus far. in the first two years, inflation targets were overshot, and in the third and fourth years, there was a significant undershooting. indeed, in poland, external factors may have been of less importance in explaining the failure to meet inflation targets than in the czech republic, while the conduct of macroeconomic policy has probably mattered more. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 77 first, unexpected fiscal expansion combined with easy monetary policy contributed to the acceleration of inflation and overshooting of inflation targets; and subsequently, sharp tightening of monetary policy, in the absence of further easing of fiscal policy, reduced inflation sharply and produced a significant undershooting of the target. a difficult problem for inflation targeting in transition countries is the stormy relationship between the central bank and the government. this can be alleviated by having a direct government involvement in the setting of the inflation target and with a more active role of the central bank in communicating with both the government and the public. table (2). cpi inflation rates in canada, new zealand, sweden, and the u.k. year canada new zealand sweden the u.k. industrial countries 1977-1986 7.5 13.1 9.2 9.5 7.3 1987 4.4 15.7 4.2 4.1 3.1 1988 4.0 6.4 5.8 4.9 3.4 1989 5.0 5.7 6.4 7.8 4.4 1990 4.8 6.1 10.5 9.5 5.0 1991 5.6 2.6 9.3 5.9 4.5 1992 1.5 1.0 2.3 3.7 3.3 1993 1.8 1.3 4.6 1.6 3.0 1994 0.2 1.7 2.2 2.5 2.4 1995 2.1 3.7 2.5 3.4 2.6 1996 1.6 2.3 0.5 2.4 2.4 1997 1.5 1.1 0.5 3.2 2.1 1998 0.9 1.2 -0.1 3.4 1.5 1999 1.7 -0.1 0.4 1.5 1.4 2000 2.7 2.5 0.9 2.8 2.2 2001 2.5 2.7 2.4 1.8 2.2 2002 2.2 2.6 2.1 1.6 1.5 source: imf, international financial statistics and imf outlooks, following mccallum (1996), we investigate inflation targeting arrangements in canada, new zealand, sweden, and the united kingdom, all of which adopted inflation targets between 1990 and 1993. a striking feature of the four arrangements is the similarity of the feedback procedures used by the central banks of these nations. in all of them, money market conditions were tightened or loosened when inflation forecasts for a year ahead lie outside the target range, whose width is 2 percent. to address the question of whether the performance of these countries has been successful, cpi inflation rates are reported in table (2). for comparison, average cpi inflation rates across industrialized nations are reported in the final row. as it is seen in table (2) over the reported years prior to 1990, the four countries all had inflation rates that were higher than the average. in contrast, during 1992, 1993, and 1994, three of these countries experienced less inflation than the average of industrial countries. whether or not, this outcome is a result of inflation targeting schemes per se; it would seem to be the case that the monetary policy stance has altered in these four countries. moreover, as it is seen in the above-mentioned table, the inflation rate has been lower than the average of industrial countries from 1994 to 1999 in four countries, except for the u.k. and for new zealand in 1995, supporting the success of inflation targeting strategy. table (3) reports the real gdp growth rates for the four inflation targeting countries and the average value for the industrial countries. in these figures, one can find that undesirable real effects were generated by the adoption of antiinflationary measures. however, there has been an encouraging revival of growth since 1993, output growth rates above the industrial average were recorded in canada, sweden, and the united kingdom. all in all, the results suggest that the four inflation targeters have experienced higher economic growth than the industrial average except for new zealand in 1997 and 1998. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 78 table (3). real gdp growth rates in canada, new zealand, sweden, and the u.k. year canada new zealand sweden the u.k. industrial countries 1977-1986 3.1 1.6 1.7 2.1 2.7 1987 4.2 -1.7 3.1 4.8 3.2 1988 5.0 3.0 2.3 5.0 4.4 1989 2.4 -0.5 2.4 2.2 3.3 1990 -0.2 -0.1 1.4 0.4 2.4 1991 -1.8 -2.1 -1.1 -2.0 0.8 1992 0.6 -0.2 -1.9 -0.5 1.5 1993 2.2 4.1 -2.1 2.2 1.2 1994 4.5 4.8 2.2 3.8 3.0 1995 2.77 3.7 3.7 5.5 2.8 1996 1.7 3.0 1.0 5.9 3 1997 3.9 2.5 2.0 6.4 3.5 1998 3.5 -0.4 3.6 6.0 2.7 1999 15.8 4.1 4.5 4.9 3.4 2000 9.2 2.0 3.6 4.7 3.9 2001 3.9 4.3 1.2 4.5 1 2002 4.2 3.6 5.6 1.8 source: imf, international financial statistics, and imf outlook. 3. inflation targeting in iran before implementing the first and second five year development plan there is no record of inflation targeting in iran, however, during the first two plans (1989-1994 and 1996-2001) inflation targets have been set within the plans. though there are some similarities between inflation targeting in iran and other countries, the targets stand at much higher levels in iran compared with other countries. for instance, the second five year development plan envisaged an inflation target of 12%, and the third development plan targeted an inflation rate of 15%. indeed, to achieve the goals, monetary authorities need to implement all the monetary instruments effectively. however, in iran, due to the lack of central bank independence and administrative, regulatory, monetary authorities have been being unable to use money market operations, discount rate, and the reserve requirement effectively. as a result, monetary authorities have not succeeded to achieve the goals, undermining the credibility of the policies. the decomposition of the monetary base in iran, since the revolution (1978), reveals that the government debt to central bank has adversely affected the effectiveness of monetary instruments. on the other hand, the monetary instruments have been limited through the islamic banking law approved in 1982. indeed, under current circumstances, the only means to control the money supply are through the reduction of government debt to the central bank and also increasing the reserve requirement ratio. the legal framework for controlling government debt has been envisaged in the five-year development plans and the budget laws. accordingly, credit ceilings have been set with emphasize on the monetary authorities' responsibilities to react against any increase in the money supply. though the government deficit has been controlled according to the budget law and the plan, the foreign exchange obligation account4 increased enormously during the past decade. the government used this account to service its foreign debts with the official exchange rate, which has enlarged the money supply, in turn. the major challenge that the government faces with is the lack of fiscal discipline, which in turn, may lead to the failure of inflation targeting as a framework for monetary policy. indeed, the dominance of the fiscal sector on the monetary authorities has undermined the independence of the central bank, leaving small room for the success of inflation targeting strategy. as the credit ceilings are determined for a financial year within the budget, they should be allocated on a monthly basis and announced to the banks. in case, there is a violation from the credit ceiling it should be adjusted within the next month. to achieve this goal, the central bank needs to implement monetary instruments, forecast the monetary 4 foreign exchange obligation account was established in 1993 to compensate the importers for the difference of the unified exchange rate with the nominal exchange rate. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 79 aggregates, and find out the relationship between the general price level and the allocated credits. in doing so, the central bank needs a monetary model to evaluate the stance of monetary policy. such a model will be presented in the next section to forecast the inflation rate and to evaluate the trade-off between inflation targeting and the real output. most of the empirical studies that have been carried out for iran (komijani and bidabad 1999) suggest that the supply side factors or cost-push inflation have lower effects on the cpi inflation than demand-push factors. indeed, according to the empirical studies, 99% of the changes in cpi, in the long run, can be explained by the money supply. in other words, these studies suggest that inflation in iran is a monetary phenomenon. therefore, the most appropriate way to control inflation is through money supply. moreover, the monetary transmission mechanism of the real sector is trivial. any change in the money supply has negligible effects on the interest rate and investment due to administered interest rates. all in all, one can argue that any decrease in the money supply will not affect the real sector of the economy in the long-run. concerning the monetary policy stance, it has historically been dominated by fiscal policy. therefore, inflation targeting will be a more appropriate instrument to conduct the monetary policy with a consensus between the monetary authorities, government, and the public. indeed, the pragmatic argument for inflation targeting begins with the proposition that, from a long-run point of view, monetary policy has a dominating influence on an economy's inflation rate and negligible influence on its rate of unemployment and output. this proposition, which is an interpretation of the natural rate hypothesis, is supported by the empirical results, as will be seen in the next section. 4. monetary model: the rationale for inflation targeting emerges as the joint consequences of two lines of thoughts within the economics of monetary policy. first, because the central bank in effect has only one instrument at its disposal, the standard tinbergen-theil logic implies that it is possible to express the policy chosen at any time in terms of the intended outcome of any single economic magnitude that monetary policy affects: inflation, output, employment, the economy's foreign balance. the second line of thought within the field that underlies the concept of inflation targeting is the phelps-friedman "natural rate" model of aggregate supply in the market for goods and services. under the most familiar version of the natural rate model, there exists a trade-off between real outcomes like output and employment and nominal outcomes like inflation and prices. by contrast, in the long run, there is no evidence to support such a trade-off; long-run real outcomes depend on such real factors as endowments, technologies, and etc. in the long run, nominal magnitudes are subject to monetary influences. indeed, aggregate shocks that move output and inflation in opposite directions create a trade-off between output and inflation variability, forcing the central bankers to make a choice. in this section, we present a very simple monetary model according to the monetarists' view. the following flow chart presents the relationship between the main variables of the model. as it is seen, the liquidity is decomposed to the net domestic assets and net foreign assets of the banking system. the net foreign asset component is affected by the official exchange rate and the balance of payments. the net domestic assets consist of three components: private sector debt to the banking system, government debt to the banking system, and net of other assets. the private sector debt to the banking system is affected by gross domestic product (gdp). the government debt to the banking system is influenced by the government budget deficit and foreign exchange obligations account. the price level is defined as a function of liquidity. change in gdp is affected by the balance of payments. the estimated results are presented in the following section, and the econometric model is estimated by ols technique. the sample period covers 1960-2001. to avoid integration problems, all level variables are used in their first differences. list of variables: m2nfae=net foreign assets of the banking system (in billion dollars) m2ngv=net government debt to the banking system (in billion rials) m2lpv=net private sector debt to the banking system (in billion rials) m2nw=other assets of the banking system (in billion rials) obd=government budget deficit (in billion rials) copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 80 bop=balance of payments (million dollars) feoa=foreign exchange obligation account (in billion rials) gdpv=nominal gdp (in billion rials) gdp=gross domestic production at fixed prices of 1982 (in billion rials) pgdp=gdp deflator (base year=1982) m2 = liquidity (in billion rials) e = exchange rate d61 = dummy variable, one for 1982 and zero otherwise d69 = dummy variable, one for 1990 and zero otherwise d72 = dummy variable, one for 1993 and zero otherwise d5873=dummy variable, one for 1994-95 and zero otherwise d = difference operator @trend = time trend the following system of equations was estimated. d(m2nfae) = c(11)*bop/1000+c(12)*d72+c(13)*d69+c(14)*d60+c(15)*d7680 d(m2ngv) = c(20)+ c(21)*obd +c(22)*ol +d(feoa) +c(23)*d79 +c(24)*d80 d(m2lpv) = c(31)*d(gdpv)+c(32)*d80 d(m2nw) = c(41)*d7780+c(42)*d79+c(43)*d80+c(44)*@trend d(pgdp) = c(51)*d(m2) +c(52)*d80 d(gdp) =c(60)+c(61)*bop/1000+ c(62)*d(gdp(-1))+c(63)*d5659 +c(64)*d65 +c(65)*d55 m2 = m2nfae * e + (m2ngv + m2lpv + m2nw) gdpv = gdp * pgdp copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 81 flowchart (1). relationship between the main variables of the monetary model ====================================================== system: sys_inf estimation method: least squares sample: 1339 1380 included observations: 42 total system (unbalanced) observations 251 ====================================================== coefficient std. error t-statistic prob. ====================================================== c(11) 0.914673 0.097201 9.410124 0.0000 c(12) -21.40064 1.346235 -15.89666 0.0000 real gdp nominal gdp official exchange rate liquidity m2 price level balance of payments net foreign assets of banking system net domestic assets of banking system changes in other assets of the banking system net other assets net gov debt to banking system net private debt to banking system government budget deficit foreign exchange obligation account changes in previous real gdp copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 82 c(13) 9.443943 1.346362 7.014414 0.0000 c(14) 5.263224 1.367823 3.847885 0.0002 c(15) -2.368778 0.621046 -3.814173 0.0002 c(20) -274.1686 167.8247 -1.633661 0.1037 c(21) 1.257852 0.055344 22.72777 0.0000 c(22) 0.219124 0.027767 7.891556 0.0000 c(23) -14060.40 975.8079 -14.40899 0.0000 c(24) 11626.61 962.0447 12.08531 0.0000 c(31) 0.309446 0.012301 25.15634 0.0000 c(32) 33424.48 2846.179 11.74363 0.0000 c(41) -12933.99 598.0382 -21.62736 0.0000 c(42) 29662.57 960.1021 30.89523 0.0000 c(43) 4877.350 960.1694 5.079677 0.0000 c(44) -15.28007 5.684013 -2.688254 0.0077 c(51) 7.03e-06 2.96e-07 23.79357 0.0000 c(52) -0.294803 0.032899 -8.960742 0.0000 c(60) 6249.474 1531.646 4.080234 0.0001 c(61) 1354.759 568.7077 2.382171 0.0180 c(62) 0.368434 0.093348 3.946897 0.0001 c(63) -23153.95 4256.940 -5.439107 0.0000 c(64) -26557.75 8121.092 -3.270219 0.0012 c(65) 23064.76 8199.437 2.812969 0.0053 ====================================================== determinant residual covariance 5.51e+22 ====================================================== equation: d(m2nfae) = c(11)*bop/1000+c(12)*d72+c(13)*d69 +c(14)*d60+c(15)*d7680 observations: 42 r-squared 0.913271 mean dependent var 0.132592 adjusted r-squared 0.903895 s.d. dependent var 4.341973 s.e. of regression 1.346047 sum squared resid 67.03814 durbin-watson stat 2.147208 equation: d(m2ngv) = c(20)+ c(21)*obd +c(22)*ol+d(feoa)+c(23) *d79+c(24)*d80 observations: 42 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 83 r-squared 0.971197 mean dependent var 2320.165 adjusted r-squared 0.968084 s.d. dependent var 5260.589 s.e. of regression 939.8117 sum squared resid 32680103 durbin-watson stat 2.238885 equation: d(m2lpv) = c(31)*d(gdpv)+c(32)*d80 observations: 42 r-squared 0.960945 mean dependent var 5773.873 adjusted r-squared 0.959969 s.d. dependent var 13071.46 s.e. of regression 2615.321 sum squared resid 2.74e+08 durbin-watson stat 1.049681 equation: d(m2nw) = c(41)*d7780+c(42)*d79+c(43)*d80+c(44) *@trend observations: 42 r-squared 0.967070 mean dependent var-692.9867 adjusted r-squared 0.964470 s.d. dependent var 4158.716 s.e. of regression 783.8891 sum squared resid 23350323 durbin-watson stat 3.436861 equation: d(pgdp) = c(51)*d(m2) +c(52)*d80 observations: 42 r-squared 0.923764 mean dependent var 0.047743 adjusted r-squared 0.921858 s.d. dependent var 0.089887 s.e. of regression 0.025127 sum squared resid 0.025254 durbin-watson stat 2.826425 equation: d(gdp)=c(60)+c(61)*bop/1000+c(62)*d(gdp(-1))+c(63) *d5659+c(64)*d65 +c(65)*d55 observations: 41 r-squared 0.706315 mean dependent var 6893.122 adjusted r-squared 0.664359 s.d. dependent var 13732.14 s.e. of regression 7955.646 sum squared resid 2.22e+09 durbin-watson stat 1.521260 ====================================================== copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 84 graph 1 plot of residuals of estimated equations as it is seen in the estimated results, the net foreign assets of the banking system has a positive significant relationship with the balance of payments. the coefficient on c(21) is positive and significant, supporting a positive link between the government budget deficit and the government debt to the banking system. the coefficient on c(22) is also positive and significant, representing a relationship between the obligation loans and the government debt to the banking system. interestingly enough, foreign exchange obligation account has a one to one relationship with the net government debt to the banking system. -3 -2 -1 0 1 2 3 4 40 45 50 55 60 65 70 75 80 m2nfae residuals -5000 -4000 -3000 -2000 -1000 0 1000 2000 3000 4000 40 45 50 55 60 65 70 75 80 m2ngv residuals -12000 -8000 -4000 0 4000 8000 12000 40 45 50 55 60 65 70 75 80 m2lpv residuals -3000 -2000 -1000 0 1000 2000 3000 40 45 50 55 60 65 70 75 80 m2nw residuals -.12 -.08 -.04 .00 .04 .08 .12 40 45 50 55 60 65 70 75 80 pgdp residuals -20000 -10000 0 10000 20000 40 45 50 55 60 65 70 75 80 gdp residuals copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 85 equation (5) suggests that nominal gdp is positively and significantly related to the liquidity, supporting the monetarists' view. in other words, any change in the money supply will affect the nominal gdp. in addition, net private sector debt to the banking system is positively and significantly correlated with nominal gdp. equation (6) suggests that real gdp at fixed prices is positively and significantly related to the bop. to evaluate the performance of the model, we solved the whole system for the whole ex-post sample period through dynamic simulation. graph 2 plots the actual value of the endogenous variables versus their simulated values. the 8 plots of graph 1 show the high dynamic response and credibility of the model to build simulated series as near as the actual series with a concordance of turning points. graph 2 simulated versus actual values of the endogenous variables in the dynamic solution -15 -10 -5 0 5 10 15 20 25 40 45 50 55 60 65 70 75 80 85 actual m2nfae (scenario 1) m2nfae -40000 -30000 -20000 -10000 0 40 45 50 55 60 65 70 75 80 85 actual m2nw (scenario 1) m2nw -20000 0 20000 40000 60000 80000 100000 40 45 50 55 60 65 70 75 80 85 actual m2ngv (scenario 1) m2ngv -50000 0 50000 100000 150000 200000 250000 40 45 50 55 60 65 70 75 80 85 actual m2lpv (scenario 1) m2lpv copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 86 graph 2 (cont.) simulated versus actual values of the endogenous variables in the dynamic solution 5. conclusion as the estimated results in the previous section suggest, inflation targeting in iran does not affect the real output in the long run. indeed, monetary transmission policy affects the general price level, leaving trivial effects on the real output. therefore, one can argue that there is no trade-off between inflation targeting and the real output, supporting the notion of the natural rate hypothesis. one of the main findings of this study is that major problem in achieving inflation targets in the iranian economy is the lack of transparency and credibility of the target due to fiscal situation, institutional set up for the monetary policy, and ineffectiveness of monetary instruments. indeed, as the experiences of other countries suggest fiscal discipline has a crucial role in the success of inflation targeting. moreover, the inflation target lacks credibility in iran, in the sense that inflation expectations exceed the target range. reduction of the real budget deficit through reducing the foreign exchange obligation account might restore the credibility of the government and monetary authorities. imperfect credibility has several detrimental consequences. first, imperfect credibility makes it more costly and more difficult to achieve the target. monetary policy has to be more contractionary to counter the inflationary impulses that inflation expectation causes. -50000 0 50000 100000 150000 200000 250000 300000 350000 40 45 50 55 60 65 70 75 80 85 actual m2 (scenario 1) m2 -0.4 0.0 0.4 0.8 1.2 1.6 2.0 2.4 40 45 50 55 60 65 70 75 80 85 actual pgdp (scenario 1) pgdp -100000 0 100000 200000 300000 400000 500000 600000 700000 40 45 50 55 60 65 70 75 80 85 actual gdpv (scenario 1) gdpv 40000 80000 120000 160000 200000 240000 280000 320000 360000 40 45 50 55 60 65 70 75 80 85 actual gdp (scenario 1) gdp copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 87 second, imperfect credibility most likely allows less scope for short-run stabilization of unemployment. any attempt to temporarily pursue a more expansionary policy in order to reduce temporarily high unemployment will probably be interpreted as increased tolerance towards medium and long-run inflation, and hence induce a further fall in already low credibility, with increased inflation expectations and increased medium and long-term interest rates, as a result. the increased inflation expectation is also likely to result in faster nominal wage and price adjustment, which reduces the real effect of a given monetary expansion. indeed, the government and the parliament in their attempts to expand the credibility of the system should reduce their incentives to create inflation by strengthening price stability as a goal for monetary policy. in doing so, the government and the parliament can achieve fiscal consolidation by eliminating partial de-indexing of expenditures and taxes. the most crucial challenge that the central bank should overcome is to remedy the credibility problem through pursuing a monetary policy that fulfills the inflation targets. the central bank can increase its commitment by a policy statement that clarifies that inflation targets will be strictly in effect for the whole third plan. references ball laurence, and niamh sheridan, "does inflation targeting matter?" nber, working paper 9577, march 2003. bernanke, b.s. and f.s. mishkin," inflation targeting: a new framework for monetary policy, journal of economic perspectives, 1997. bernanke ben s., laubach, thomas, mishkin fredric s. and posen adam s. " inflation targeting: lessons from the international experience. princeton, nj: princeton university press. bidabad, bijan, general monetary equilibrium. lap lambert academic publishing, omniscriptum gmbh & co. kg, isbn: 978-3-659-54045-5, spring 2014. bidabad, bijan, parallel exchange market control by monetary targeting and complementary policies. monetary and banking research academy, central bank of iran, tehran, iran, 2007. http://www.bidabad.com/doc/exchange-control.pdf bidabad, bijan, analysis of built models for appropriate monetary policy for economic stabilization in iran, parliament and research, journal of research center of iran's parliament, no. 9, 2nd year, pp. 59-95, tehran, iran, 1994. http://www.bidabad.com/doc/siyasathaye-pooli-banameh-dovom.pdf bidabad, bijan, (2007) triangular causality and controlling parallel exchange market. monetary and banking research academy, central bank of iran, tehran, iran. http://www.bidabad.com/ bidabad, bijan, m.j. mojarrad, the inflation targeting policy for iran. proceeding of the 6th conference of monetary and exchange rate policies, monetary and banking research academy, central bank of iran, pp. 21-57, 1996. some parts of it reprinted under the titles: "price control by inflation targeting" and "experience of some countries on inflation targeting policy"; tazehaye eghtesad, the monthly review of science, economic and banking, pp. 10-14. 22-27, no. 79, august 1999. monetary and banking research academy, central bank of iran. http://www.bidabad.com/doc/hadafgozari-tavarom.pdf cechetti s, and m. ehrmann "does inflation targeting increase output volatility? an international comparison of policymakers preferences and outcomes", central bank of chile, working paper 69, april 2000. http://www.bcentral.c1/estudios/dtbc/69/dtbc69.pdf cecchetti stephen g. and junhan kim, "inflation targeting, price-path targeting, and output variability", nber working paper 9672, may 2003. christiano, lawrence j., martin eichenbaum; charles l. evans, "identification of the effects of monetary policy shocks," in m.i. blejer et al. eds, financial factors in economic stabilization and growth. new york, cambridge university press, 1996. ditmar r., gavin, w.t, and f.e. kydland "what do new-keynesian phillips curves imply for price level http://www.bidabad.com/doc/exchange-control.pdf http://www.bidabad.com/doc/siyasathaye-pooli-banameh-dovom.pdf http://www.bidabad.com/ http://www.bidabad.com/doc/hadafgozari-tavarom.pdf http://www.bcentral.c1/estudios/dtbc/69/dtbc69.pdf copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 3, no. 1; 2019 88 targeting, review, federal reserve bank of st. louis 2000. estrella arturo and frederic s. mishkin "is there a role for monetary aggregates in the conduct of monetary policy", journal of monetary economics, october 1997. feldstein, m. "the costs and benefits of price stability", nber working paper 6200, september 1997. friedman, benjamin m., "the use and meaning of words in central banking: inflation targeting, credibility, and transparency, nber working paper 8972, june 2002. jonas. jiri, and frederic s. mishkin "inflation targeting in transition countries: experience and prospects, nber working paper 9667, april 2003. king, m., "challenges for monetary policy: new and old", in new challenges for monetary policy, federal reserve bank of kansas city, kansas city, missouri, 1999. komijani, a; bijan bidabad, appropriate monetary policy for economic stabilization in iran. research project no. 111. ministry of finance and economic affairs, deputy of economic affairs, tehran, iran, phase i, 1992. reprinted (book) by deputy of economic affairs, ministry of finance and economic affairs, 1994. reprinted in economic journal, deputy of economic affairs, ministry of finance and economic affairs, vol. 4, pp. 2-14, vol. 5 pp. 2-12, vol. 6, pp. 2-9, vol. 7 pp. 2-7, 1996. http://www.bidabad.com/doc/siyasathayepooli-vol1.pdf komijani, a; bijan bidabad, appropriate monetary and exchange rate policy for economic stabilization in iran (emphasizing adjustment policies), deputy of economic affairs, ministry of finance and economic affairs, tehran, iran, phase ii, 1993. reprinted (book) by deputy of economic affairs, ministry of finance and economic affairs, 1996. http://www.bidabad.com/doc/siyasathaye-pooli-vol2.pdf masson paul, r., savastano, miguel a.; sharma sunil. "the scope for inflation targeting in developing countries, imf working paper 130, october 1997. mccallum bennett t., "inflation targeting in canada, new zealand, sweden, the united kingdom, and in general", nber working paper 5579, may 1996. mccallum bennett t., "specification of policy rules and performance measure in multicountry simulation studies, journal of international money and finance, june 1994. mishkin frederic s., "inflation targeting in emerging market countries", american economic review, may 2000. mishkin frederic s., "issues in inflation targeting "in price stability and the long-run target for monetary policy, bank of canada,: ottawa, canada, 2001. mishkin frederic s. "international experiences with different monetary regimes", journal of monetary economics, 43, 1999. mishkin frederic s., "international experiences with different monetary policy regimes," journal of monetary economics, vol 43, 1999. mishkin frederic s, and posen, adam s. "inflation targeting: lessons from four countries", federal reserve bank of new york, economic policy review, august 1997. mishkin frederic s., and klaus schmidt-hebbel "one decade of inflation targeting in the world: what do we know and what do we need to know", nber working paper 8397, july 2001. svensson lars, e.o., the swedish experience of an inflation target, nber working paper 4985, january 1995 copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). http://www.bidabad.com/doc/siyasathayepooli-vol1.pdf http://www.bidabad.com/doc/siyasathaye-pooli-vol2.pdf contents asian finance & banking review vol. 1, no. 1; 2017 issn 2576-1161 e-issn 2576-1188 published by centre for research on islamic banking & finance and business 76 performance of foreign exchange operation of private commercial banks: a case on southeast bank limited k. m. anwarul islam1 1department of business administration, the millennium university, dhaka, bangladesh correspondence: department of business administration, the millennium university, dhaka, bangladesh, e-mail: ai419bankingdu@gmail.com received: october 02, 2017 accepted: october 16, 2017 online published: october 30, 2017 abstract the banking sector is participating in many events on a daily basis. conversely, the process of banking is become faster, simpler, and more universal all at the same time. they're constantly coming up with various ideas and products to meet customer demand. banks and other financial services organizations all search for service improvement opportunities in order to gain a competitive advantage in the financial sector. as a result, every person has a banking procedure they should know about. in accordance with their goal, southeast bank limited believes in building together towards tomorrow. to accomplish the goal of getting more customers, the bank demonstrates excellence in all stages while also fostering continual development. with this fast changing competitive climate, banks' strategic plans and networking will help them keep pace with the competition. the overall objective of this research had represented the foreign exchange performance of import, export and foreign remittance of southeast bank limited. this paper examined about import, export and remittance performances have been analyzed and find out some problems relating to foreign exchange activities. finally this research finished with some possible recommendation and concluding remark of the study. keywords: foreign exchange, bank, export, import. 1. introduction when it comes to producing particular goods, every country has its natural advantages and disadvantages. and in other areas, they have natural disadvantages. to understand this finding, think about the economic policies of two different countries. the policies of one country require that that country import specific goods whereas the policies of another country require that the country export its surpluses. trade is based on these transactions. there are three major definitions of the word “foreign exchange.” in addition, it is also a word that is used to refer to currencies of other countries, such as referring to the currencies of only one of them. trade instruments such as bills of exchange, drafts, travelers cheque, and other types of foreign remittance are usually referred to as bearer instruments. a third definition of foreign exchange, in addition to the previous two, is that it is also known as the balance in foreign currencies owned by a country. section 2(d) of the foreign exchange regulations-1947 in bangladesh describes foreign exchange as foreign currency, including any performance of foreign exchange operation of private commercial banks: a case on southeast bank limited k. m. anwarul islam 77 instrument drawn, accepted, made or issued under clause 13 of article 16 of the bangladesh bank order, 1972, and all deposits, credits and balances payable in any foreign currency. foreign exchange regulations, section 3, gives the bangladesh bank the authority to provide licenses to scheduled banks that permit them to deal with foreign exchange. authorized dealers are called upon to process all customers' financial transactions (ad). in addition to being provided by the bangladesh bank, licenses are also issued to individuals or businesses for the purpose of exchanging foreign currency instruments, such as t.c. (bills and coins), currency notes, and coins. authorized money changers are frequently called as wacky money changers. foreign exchange is the method used to convert one country's money into another's. the purpose of foreign exchange is to help move assets in one country's currency to another country's currency. 2. hypothesis development i have developed two hypotheses to test dependent variables because the number of an independent variable is one.  h1: there is exist significant relationship between export and foreign exchange operation.  h2: there is exist significant relationship between import and foreign exchange operation. 3. research objectives the main objectives of the research are as follows  to analysis of the import, export and remittance performances of southeast bank limited.  to find out some problem related to foreign exchange operation of southeast bank limited.  to provide some suggestion to solve the problem based on findings 4. research methodology this study has been completed on the basis of all of the research that was conducted during the course of the study. by using various charts and tables, i have shared my research and findings. which analytical data elements are included in the analysis? the work plan specifics are listed below: 4.1 data collection method this research has gathered relevant data by going directly to multiple sources of data. the operating procedure is documented, and various employees are involved. there have been no systematic questionnaires employed. the bank has gathered information on office operations through discussing and talking with bank employees. 4.2 data sources method a diverse range of research sources are utilized in the completion of this project. the following information is included below: 4.2.1 primary sources:  face-to-face talks with bank employees  face-to-face discussions with clients 4.2.2 secondary sources:  annual report of southeast bank limited. performance of foreign exchange operation of private commercial banks: a case on southeast bank limited k. m. anwarul islam 78  different papers of southeast bank limited.  files and documents of the branch  unpublished data  different text books. 5. data analysis and discussion 5.1 import performance of southeast bank limited. import performance of southeast bank limited from the year 2015 to 2011 is given in the following table: figure in million bdt particulars 2015 2014 2013 2012 2011 import 151,812.58 155,691.00 131,644.82 111,537.50 99,509.01 figure: import of southeast bank limited in this graph we have noticed that the import level of the southeast bank ltd. increasing severally over 2011, 2012 and 2013, & 2014. but in 2015 the import level is slightly decreasing. in 2014 total import was 155,691.00 million but in 2015 are 151,812.58 million total falls the amount is 3,878.42 million. other all import performance is good. 5.2 export performance of southeast bank limited export performance of southeast bank limited from the year 2015 to 2011 is given in the following table: figure in million bdt particulars 2015 2014 2013 2012 2011 export 126,323.89 112,137.60 95,220.40 84,464.20 75,982.06 performance of foreign exchange operation of private commercial banks: a case on southeast bank limited k. m. anwarul islam 79 figure: export of southeast bank limited this diagram shows that the positive reaction over the 5 years. the export level is increasing day by day. in 2015 the export level is catch the optimum level of the curve. in the year 2014 total export was 112,137.60 million and 2015 is 126,323.89 million total increases are 14,186.29 million. overall export performance is very well and their export operation increasing day by day. 5.3 foreign remittance performance of southeast bank limited. foreign remittance performance of southeast bank limited from the year 2015 to 2011 is given in the following table: figure in million bdt 2015 2014 2013 2012 2011 foreign remittance 60,708.50 48,740.50 39,299.10 41,455.40 49,544.10 figure: foreign remittance of southeast bank limited performance of foreign exchange operation of private commercial banks: a case on southeast bank limited k. m. anwarul islam 80 remittance sector in 2011 was very much positive. but in 2012 the foreign remittance was decreasing and 2013 was very much decreasing but in 2014 the remittance rate was increased than 2012 and less than 2011. in 2015 the remittance rate hit the top point of the level over then 2011. if in 2011 then gradually increase of foreign remittance then 2015 was more than existing amount. in 2013 was most recession year in last five year. 5.4 import vs export performance of southeast bank limited import vs export performance of southeast bank limited from the year 2015 to 2011 is given in the following table: figure in million bdt 2015 2014 2013 2012 2011 import 151,812.58 155,691.00 131,644.82 111,537.50 99,509.01 export 126,323.89 112,137.60 95,220.40 84,464.20 75,982.06 figure: import vs. export of southeast bank limited in this graph we have noticed that import is more than export in last five years. every years import is gradually increase but in 2015 is decrease than 2014. export is gradually increased in every year. we saw that in 2011 import is more than export amount is 23,526.95 million. in 2012 and 2013 gradually increase import more than export but in 2014 import is more than export last three year amount is 43,553.04 million. but in 2015 import verses export is decrease than 2014, the amount between import and export is 25,488.69 million. 6. model summary after computing an average value separately for all the variables i have done regression analysis to get the final result. model summary model r r square adjusted r square std. error of the estimate 1 .865a .749 .497 5963.959 a. predictors: (constant), import, export performance of foreign exchange operation of private commercial banks: a case on southeast bank limited k. m. anwarul islam 81 here r-squire =0.749 means that our three variables have 74.9% influence on the foreign exchange operation. the rest of 25.1% influenced by other variables i have not considered for this research. for testing hypothesis we are considering 5% error. it means that if our p -value is greater than 0.05 our null hypothesis will be rejected and if less than 0.05 our null hypothesis will be accept and when less than 0.05, then our alternative hypothesis will be accepted. otherwise hypothesis will be rejected. h1: there is exist significant relationship between export and foreign exchange operation. here p-value= 0.169, so this hypothesis is accepted. h2: there is exist significant relationship between import and foreign exchange operation. here p-value= 0.250, so this hypothesis is accepted. 7. findings and recommendation during my research period in the southeast bank ltd., i have research for one month. during this period i have found that:  import target level is not achieved in 2015. in fact it is the actual import is lower than 2014.  foreign remittance performance is fluctuating over the years. so it is an alarming issue.  export performance is good as it achieve the target level.  the bank undertaken strong policy guideline to regulate and monitor to minimize foreign exchange risk due to exposure in currency movement.  the foreign exchange department has lack of staff.  we can see the performance of advising of l/c is very good. we know more advising of l/c in importer are busy to import business rather than the export business. i had observed some shortcomings regarding foreign exchange operation and other aspects of their banking. on the basis of my observation i would like to present the following recommendations.  whereas the foreign exchange operation is gradually increasing and our business environment is almost anovaa model sum of squares df mean square f sig. 1 regression 211825653.841 2 105912826.920 2.978 .251b residual 71137612.287 2 35568806.144 total 282963266.128 4 a. dependent variable: remittance b. predictors: (constant), import, export coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 32140.634 16104.320 1.996 .184 export .941 .445 2.290 2.116 .169 import -.594 .371 -1.733 -1.601 .250 a. dependent variable: remittance performance of foreign exchange operation of private commercial banks: a case on southeast bank limited k. m. anwarul islam 82 foreign trade, it is essential to maintain a good and sophisticated technology and policy in maintaining the operations.  the import performance is poor in 2015, it should be controlled with right process and provide credit facility for the importer.  for improving foreign remittance to connect much international money send company.  letter of credit opening procedure and margin requirement may be relaxed for prime customers, otherwise new and competitive banks will take the clients away by giving special facilities.  the bank should take initiative to develop an effective’s research and development center to promote innovative product or service ideas & to sense threat & competitiveness in advance to reduce risks.  the bank can diversify its import portfolio by increasing customers to reduce dependency from some customers.  they always try to keep the motivated skilled employee in the organization. 8. conclusion with regards to the new worldwide economic system, from the very start, banking operations have become a very crucial matter. with all of the recent development in the field of banking, private commercial banks are now merely waiting for new customers. there are many various approaches to think about how to establish an idea. the function that commercial banks play in the growth of our economy and financial system is critical in bangladesh. a strong position is maintained in the competitive market today by southeast bank limited. it is continuously aiming for excellence in banking by offering a wide range of innovative products and services to the many client groups, including individuals, corporations, and small and medium-sized businesses. the southeast bank limited, as well as generating a better percentage of profit, also contributes to the total amount earned by southeast bank limited. more thorough analysis offers a larger chance of bringing better results in the future. southeast bank limited's ability to serve customers is being expanded across the country by establishing new branches at new locations. there has been an increase in the dependability of the customer base in southeast bank limited through time, making it easier for the company to provide more benefits. however, they may offer additional online and atm services, having a greater range of capabilities, to make their services more efficient and easier for customers. they might do the recommended things every day in order to improve over time. a critical role in the socio-economic outlook and in the growth of our economy may be played by southeast bank limited. references annual report of southeast bank ltd. a training program book by bibm islam, k. m. a., alam, i., & al-amin, d. m. (2015). foreign exchange operation of private commercial banks in bangladesh: a case study on ab bank limited. international journal of innovative research and creative technology, 1(3). copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. contents asian finance & banking review vol. 1, no. 1; 2017 issn 2576-1161 e-issn 2576-1188 published by centre for research on islamic banking & finance and business 93 financial statement analysis of beximco synthetics limited k. m. anwarul islam1 1department of business administration, the millennium university, dhaka, bangladesh correspondence: department of business administration, the millennium university, dhaka, bangladesh, e-mail: ai419bankingdu@gmail.com received: october 04, 2017 accepted: october 18, 2017 online published: october 30, 2017 abstract this paper deals with the financial statement analysis of beximco synthetics ltd. to get a practical view of how analysis is done using financial statements. we have taken the four year’s (2010-2013) financial statements of the company to complete the whole analysis. in ratio analysis we calculated various ratios such as internal liquidity ratios, operating efficiency ratios, and ratios for risk analysis and operating profitability ratios etc. at first the financial statements were reformulated to get pure views of the trends regarding different items of the statements. keywords: financial statement analysis, bsl, ratio analysis, dupont analysis. 1. introduction the study of financial statements helps investment decisions by revealing information on the financial statements that is relevant to the decisions. the objective of the assessment is to determine the financial health of the company based on financial statements. to better financial statement analysis, much empirical accounting research has attempted to identify and measure value-relevant accounting qualities. assumption is made in this study that market pricing acts as a suitable standard to compare firms' values and so serves as a reference for the accounting information. accounting qualities are correlated with stock prices, therefore they might be seen as value-relevant. several preceding 'information content' publications are the likes of ball and brown (1968) and their successors, and together, they demonstrate that accounting earnings and some of its constituents encapsulate market information. 2. literature review feroz, kim, and raab (2003) ratio analysis is frequently used to assess the efficiency of a business. another important reason why ratios are so widely accepted is that they are rather simple to calculate. additionally, their interpretation is a source of confusion, particularly when two or more ratios send opposing messages. a last criticism of ratio analysis is that it is subjective because it is the analyst's job to choose ratios to evaluate the overall performance of a company. damitio, schmidgall, and dennington (1995) a few different ways exist for analyzing the statement of an empirical research on shinepukur holdings ltd: strategy, accounting, ratio, sensitivity and prospective analysis k. m. anwarul islam 94 cash flows. the most common is the preparation of comparative statements of cash flows, while a less common technique is the use of ratio analysis. this article analyzes the financial accounts of a fictitious hotel, the example inn, using these financial statement analysis methods. standard-setters (2002) an investigation of whether the manner financial reporting is done is affected by country cultures is performed by the writers. three groups of professional accountants from the same large multinational accounting firm is used to carry out an experiment where the same financial information about two fake companies is presented to three separate sets of accountants, who hail from three different nations. because the accounting regulations governing warranties are the same in every country, the accountants calculate warranty expenses for warranties (returned products). when investigating which figures may be considered "average," the authors discover that the estimations in the three nations vary greatly. gross leverage is the total liabilities of a business versus its equity. many liabilities, like debt issued by banks or government agencies, are created through finance; however, other liabilities, such payables to suppliers, customers, and workers, result from doing business. in healthy capital markets, liabilities are often traded as price takers. however, since the input and output markets are imperfect compared to the capital markets, firms are able to add value in their operations. operating liabilities, which originate in day-to-day business operations, have certain characteristics that bear similarity to those of liabilities created by external sources. 3. analysis of data for ratio analysis, we have chosen beximco synthetics limited. here we have taken 4 years of data and our first calendar year of data is 2010. our findings by using the provided ratio analysis template, we have found the following ratios: ratio year 2010 2011 2012 2013 current ratio 1.09 1.30 1.18 1.31 quick ratio 0.30 0.42 0.36 0.37 inventory turnover 1.07 1.06 0.98 1.07 average collection period 24.47 51.41 55.57 46.88 fixed asset turnover 1.38 1.47 1.68 2.07 total asset turnover 0.57 0.55 0.55 0.62 debt ratio 0.61 0.57 0.57 0.54 debt to equity 0.19 0.21 0.00 0.00 times interest earned 2.32 2.09 2.04 2.16 gross profit margin 21.90% 18.48% 16.29% 13.33% operating profit margin 19.37% 15.94% 13.73% 10.96% net profit margin 10.50% 6.36% 3.69% 3.44% return on total assets (roa) 6.02% 3.51% 2.03% 2.14% return on equity (roe) 15.26% 8.17% 4.72% 4.57% earnings per share (eps) tk 28.37 tk 16.54 tk 9.48 tk 9.22 price/earnings ratio 6.11 8.17 10.55 8.73 an empirical research on shinepukur holdings ltd: strategy, accounting, ratio, sensitivity and prospective analysis k. m. anwarul islam 95 and we have found the following results for dupont analysis: ratio year 2010 2011 2012 2013 net profit at/sales 10.50% 6.36% 3.69% 3.44% sales/total assets 57.36% 55.20% 54.93% 62.13% roa 6.02% 3.51% 2.03% 2.14% net profit at/total assets 6.02% 3.51% 2.03% 2.14% total assets/stockholders equity 253.40% 232.81% 232.64% 213.87% roe 15.26% 8.17% 4.72% 4.57% interpretation of ratios  current ratio current ratio shows the ability to meet future short term financial obligation. here we have the following current ratios of beximco synthetics: year 2010 2011 2012 2013 current ratio 1.09 1.30 1.18 1.31 as in all the years’ current ratio is more than 1.00, it indicates good payment ability of the company. if it would be more than or equal to 2, then it would have more payment capacity.  quick ratio it indicates the speed of payment of a company. here we have the following ratios: year 2010 2011 2012 2013 quick ratio 0.30 0.42 0.36 0.37 from the above data, we find that the ratios of the company are being increased year to year on an average. as it is below 1.00, we conclude that the company is not in a satisfactory position in cash payment.  inventory turnover this ratio indicates the liquidity position of a company. here we have the following inventory turnovers over the 4 years. year 2010 2011 2012 2013 inventory turnover 1.07 1.06 0.98 1.07 in 2010 and 2013, the company was in better position during the considered 4 years. an empirical research on shinepukur holdings ltd: strategy, accounting, ratio, sensitivity and prospective analysis k. m. anwarul islam 96  average collection period year 2010 2011 2012 2013 average collection period 24.47 51.41 55.57 46.88 in 2012, the company’s average collection period is 55.57 days. it is the worst collection efficiency of the company. again, the company is in good position in collection in 2010 while its period is only 24.47 days.  fixed asset turnover it reflects the utilization of the fixed asset. over the years, the turnovers are as follows: year 2010 2011 2012 2013 fixed asset turnover 1.38 1.47 1.68 2.07 the company’s turnover is being increased year to year. its growth rate is pretty good. the company had turnover 2.07 in 2013. it indicates that the company’s fixed asset turnover is more than double of its fixed asset utilization capacity.  total asset turnover this turnover ratio indicates the effectiveness of a firm’s use of its total asset base. the findings are: year 2010 2011 2012 2013 total asset turnover 0.57 0.55 0.55 0.62 the highest turnover is in 2013 that is 0.62. it is the highest turnover among the calculated years. it explains that the company is doing well year to year.  debt ratio year 2010 2011 2012 2013 debt ratio 0.61 0.57 0.57 0.54 the debt ratio of the company is being decreased year to year. it is a good sign for the company as it lowers the financial risk as well as bankruptcy costs.  debt-equity ratio the debt-equity ratios of the company for the last 4 accounting years have is given below in table: year 2010 2011 2012 2013 debt to equity 0.19 0.21 0.00 0.00 to have a clear understanding of these ratios, we present these in the following bar chart diagram: an empirical research on shinepukur holdings ltd: strategy, accounting, ratio, sensitivity and prospective analysis k. m. anwarul islam 97 in year 2012 and 2013, there was no debt of beximco synthetics. but in previous two years the company had 19% and 21% respectively. it is good news for the common shareholders of the company.  times interest earned year 2010 2011 2012 2013 times interest earned 2.32 2.09 2.04 2.16  gross profit margin it is an indication of the extent to which revenue exceed direct cost associated with sells. it measures the rate of profit on sales. year 2010 2011 2012 2013 gross profit margin 21.90% 18.48% 16.29% 13.33% the company is in bad position in 2013 comparing to year 2010 as its gross profit margin has decreased to a great extent. it may have happened for increasing costs or decreasing of sales of the company.  operating profit margin it measures the rate of profit on sales after operating expenses. year 2010 2011 2012 2013 operating profit margin 19.37% 15.94% 13.73% 10.96% from the data we see that the company’s profit margin is being lowered year to year. hence the company’s operating efficiency is being decreased as well. it may have happened because of increasing cost of goods sold, or increasing operating costs, or decreasing sales volume. an empirical research on shinepukur holdings ltd: strategy, accounting, ratio, sensitivity and prospective analysis k. m. anwarul islam 98 a  net profit margin the data are as follows: year 2010 2011 2012 2013 net profit margin 10.50% 6.36% 3.69% 3.44% as gross profit margin and operating profit margin has decreased, this margin has decreased as well year to year. it tells us that the net income on net sales is being decreased. it is an indication of lower operating profitability of the company.  return on total assets it tells us how much profit a company is able to generate for each tk of the assets invested. year 2010 2011 2012 2013 return on total assets (roa) 6.02% 3.51% 2.03% 2.14% the company’s return on assets is lowest in 2013, 2.14% and highest in 2010, 6.02%. its growth rate is negative. so it’s not a good situation for the company for their invested assets. it may have resulted because of increasing of invested assets but not increasing of sales volume in the same rate.  return on equity it is a comprehensive indicator of company’s performance because it provides and indicates how well managers are implying the funds invested by the firm’s shareholders to generate returns. the data of this ratio is given below: year 2010 2011 2012 2013 return on equity (roe) 15.26% 8.17% 4.72% 4.57% generally it is a good sign if it is 10-14%. but in 2013 and during the previous years, this rate is being decreased.  earnings per share it is the ratio that point out rate of earnings on each share. year 2010 2011 2012 2013 earnings per share (eps) tk 28.37 tk 16.54 tk 9.48 tk 9.22 to have a better understanding, we have presented the above data in graph: an empirical research on shinepukur holdings ltd: strategy, accounting, ratio, sensitivity and prospective analysis k. m. anwarul islam 99 here we find that eps of beximco synthetics has been decreasing year to year. it is not a good sign for the company as well as company shareholders. in the year 2013, the company issued more 150,000 common shares. as a result, eps decreased more in year 2013.  price earnings ratio (eps) year 2010 2011 2012 2013 price/earnings ratio 6.11 8.17 10.55 8.73 although price is decreasing year to year in dhaka stock exchange, the amount of price earnings ratio did not decrease. besides, the eps of the company has been decreasing as well. but the rate of decreasing of eps was a little bit lower than price growth. so the ratio has increased over the years. the share price of beximco synthetics in dse on 31 december in respective years was as follows: year 2010 2011 2012 2013 share price tk 173.26 tk 135.07 tk 103.18 tk 80.50 dupont analysis  net profit at/sales year 2010 2011 2012 2013 net profit at/sales 10.50% 6.36% 3.69% 3.44% the trend of net profit growth is decreasing. it is because the volume of cost of goods sold is increasing year to year. we have found that operating expense has not increased by this time rather it has decreased. so cost of goods sold is responsible for this decreasing growth.  sales/total assets year 2010 2011 2012 2013 sales/total assets 57.36% 55.20% 54.93% 62.13% we find that the ratio is highest in 2013. it has increased by 7.19% from year 2012. it is due to the decrease of total assets in 2013.  return on total assets year 2010 2011 2012 2013 roa 6.02% 3.51% 2.03% 2.14% here the roa has increased by 0.11% in 2013 because of increase in sales and decrease in total assets.  total assets/ stockholders equity year 2010 2011 2012 2013 total assets / stockholders equity 253.40% 232.81% 232.64% 213.87% here the percentage change of total assets in the first 3 years was less than the percentage change of stockholders equity. so the ratios have decreased over the years. in last year, 2003, the total assets have decreased but the stockholders equity has increased as well. so there is a significant decrease in this year. an empirical research on shinepukur holdings ltd: strategy, accounting, ratio, sensitivity and prospective analysis k. m. anwarul islam 100  return on equity (roe) year 2000 2001 2002 2003 roe 15.26% 8.17% 4.72% 4.57% as the net income of the company over the years has decreased, but the stockholders equity has increased over the years, so the roe of the company has decreased to a great extent over the years. in year 2012 and 2013, the percentage change is less comparing to previous years. it is because in 2013, the stockholders equity has increased. 4. conclusion the company was in bad position in 2013 comparing to year 2010 as its gross profit margin has decreased to a great extent. it may have happened for increasing costs or decreasing of sales of the company. the company’s profit margin is being lowered year to year. hence the company’s operating efficiency is being decreased as well. it may have happened because of increasing cost of goods sold, or increasing operating costs, or decreasing sales volume. as gross profit margin and operating profit margin has decreased, this margin has decreased as well year to year. it tells us that the net income on net sales is being decreased. it is an indication of lower operating profitability of the company. the company’s return on assets is lowest in 2013, 2.14% and highest in 2010, 6.02%. its growth rate is negative. so it’s not a good situation for the company for their invested assets. it may have resulted because of increasing of invested assets but not increasing of sales volume in the same rate. generally it is a good sign if roe is 1014%. but in 2003 and during the previous years, this rate is being decreased. although price is decreasing year to year in dhaka stock exchange, the amount of price earnings ratio did not decrease. besides, the eps of the company has been decreasing as well. but the rate of decreasing of eps was a little bit lower than price growth. so the ratio has increased over the years. references ball, r. & p. brown. (1968). an empirical evaluation of accounting income numbers, journal of accounting research, autumn, 159-178 damitio, j., schmidgall, r. s., & dennington, l. j. (1995). financial statement analysis. bottomline, 10(6), 10-23. feroz, e. h., kim, s., & raab, r. l. (2003). financial statement analysis: a data envelopment analysis approach, journal of the operational research society, 54(1), 48-58. nissim, d., & penman, s. h. (2003). financial statement analysis of leverage and how it informs about profitability and price-to-book ratios. review of accounting studies, 8(4), 531560 standard-setters, a. (2002). financial statement analysis. the cfa digest. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. copyright © cc-by-nc 2020, cribfb | asfbr asian finance & banking review; vol. 4, no. 2; 2020 issn 2576-1161 e-issn 2576-1188 published by cribfb, usa 8 an inferential study on the profitability determinants of the cement industry in bangladesh sonia rezina assistant professor school of business uttara university dhaka, bangladesh e-mail:rezina.sonia@gmail.com aysha ashraf assistant professor in finance asian university of bangladesh dhaka, bangladesh e-mail:ayshadu94@gmail.com md. atiqullah khan independent researcher dhaka, bangladesh e-mail:writetoatiq@gmail.com received: june 29, 2020 accepted: july 23, 2020 online published: july 30, 2020 doi: 10.46281/asfbr.v4i2.684 url: https://doi.org/10.46281/asfbr.v4i2.684 abstract this paper examines the impacts of firm-specific and macroeconomic factors in determining the profitability of the cement industry in bangladesh. this study took stock exchange listed all cement companies of bangladesh as samples and covered the period of 2000–2018. return on assets (roa) was chosen as the dependent variable and firm size, expense to revenue ratio, leverage, age, inflation rate, gdp growth rate, and real interest rate were chosen as independent variables where the first four are firm-specific and the other three are macroeconomic factors. this study considered roa as the profitability measurement of the firms. the study found that leverage, gdp growth rate, and real interest rate have significant impacts on the profitability. firm size, age, gdp growth rate, and real interest rate have a positive impact whereas expenses to revenue ratio, leverage, and inflation have a negative impact on the profitability of the firms under the cement industry. keywords: firm variables, macroeconomic variables, cement industry, profitability, bangladesh. 1. introduction cement industry is said to have a fundamental contribution to the infrastructural development of any country. in the world of the cement market, bangladesh's current position is fortieth but the country has huge potential in the days ahead as 14 companies are exporting cement into different countries and the market is on growth where until the first half of the 1990s, around 95% of total demand for cement in bangladesh was covered by imports (tuhin, 2019). in the last 7 years, the cement industry of bangladesh grew at almost 11.5% cagr (compound annual growth rate) due to the doubling of demand from 14.5 million metric tons per year to almost 31 million metric tons per year with the cooperation of the government, several multinational manufacturers and local entrepreneurs entered the industry in the late 1990s (ebl securities ltd., 2019). at present, bangladesh cement industry is operated by the leading global performers like lafarge (france), holcim (switzerland) along with 30 other local and multinational manufacturers (cement in bangladesh: building a concrete future – light castle partners, 2020). dhaka stock exchange (dse) is currently enlisted with seven cement companies (company listing by industry, 2020). https://doi.org/10.46281/asfbr.v4i2.684 https://doi.org/10.46281/asfbr.v4i2.684 copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 9 with a decent growth rate on average, there was a comprehensive advancement in bangladesh in the last couple of years and the country is expecting to maintain growth above 7% in the years ahead (the daily star, 2019). according to a recent forecast by hsbc, bangladesh will be the biggest mover in the global gdp product rankings in 2030 and its economy may jump 16 notches and that will make the country become the 26th largest economy in the world (rahman, 2018). up to the year 2030, the country is also expected to have the highest yearly real gdp growth of 7.1 percent and the economy size to be expanded by 2.5 times from usd 300 billion to usd 700 billion in the interim (rahman, 2018). bangladesh is facing a massive requirement for basic infrastructure, housing, and services to support its tremendous economic activities, which has put the market in high demand for cement. in recent years; cement demand is massively increasing to contribute the megaprojects. bangladesh has undertaken some large infrastructure projects to upkeep its huge economic growth. 7 mega infrastructure projects including bridges, rail lines, power plants, and a metro rail have been allotted with more than usd 3.5 billion in fy2019 (cement in bangladesh: building a concrete future – light castle partners, 2020). budget allocation to transportation and communication system has faced immense growth over time and therefore, the contribution of the development projects of the government towards the demand for cement has been identified as the highest in recent years overtaking the contribution of individual home-builders. additionally, an export target of usd 10.50 million has been set by the export promotion bureau (epb) for the fy 2019-20 (bangladesh revises export target for cement in fy20, 2019). because of the swift momentum of industrialization, urbanization, large-scale infrastructural and government development projects, and also the construction of several residential and commercial structures; there occurred remarkable growth in market demand. this trend is anticipated to be sustained in the upcoming years. profitability is a measure of firms’ performance. thus the factors influencing the profitability of the firms under cement industry is a topic of investigation. a firm’s performance and success are measured by its profitability. thus a manager's prime objective is to maximize the profits of a firm. stakeholders’ value and investors’ value are also maximized by profitability. researchers have conducted numerous studies on profitability and its major determinants. the past literature study mainly considered the firm-specific and macroeconomic determinants of profitability. agustinus and rachmadi (2008) reviewed the factors influencing the corporate performance of indonesia before and after the 1997 financial crisis. employing ordinary least square (ols), an empirical analysis covering the period of 1994-2004 of the jakarta stock exchange (jsx) consisting of panel data of the 238 listed companies showed a greater influence of macrofactors than firm-specific factors on company performance due to the 1997 great crisis. moreover, the study also revealed a positive relationship exists between firm size and profitability. hassan and muniyat (2019) focused on a study that takes a random sample of five listed pharmaceutical companies and covers the period 2008–2017. the research method for the study is a panel analysis where roa (return on assets) was used as a measure of profitability. they found that expense to revenue, and company sizes have a significant correlation with profitability which was negative. besides, they found a significant correlation between gdp growth and profitability which was positive. additionally, inflation rate, and profitability have a significant negative relationship. this paper thoroughly studied the effects of firm-specific and macroeconomic factors on the profitability of the cement industry in bangladesh. firm size, the expense to revenue, leverage, and age were considered as a set of firm-specific determinants related to profitability. gdp growth rate and real interest rate were considered as the other set of macroeconomic variables which discuss profitability in the macroeconomic environment within which the cement industry operates. 1.1objectives of the research  to identify the most relevant factors influencing the cement industry’s profitability in bangladesh.  to show the influence of different firm level and macroeconomic level factors on return on assets (roa) of the cement industry in bangladesh.  to determine the association between firm-specific and macroeconomic factors on the profitability of the cement industry in bangladesh. 2. review of literature according to aparna (2015), the efficiency of fund utilization by a firm is indicated by its high profit. bashar and islam (2014) elaborated that, profitability indicates the capacity of a firm to gain profit after deducting the operating expenses, interest on debt, and taxes from the sales revenue. pratheepan (2014) mentioned that, for an export-oriented country, determinants of profitability are the essential elements for economic survival. he discovered a significant positive relationship between firm size and profitability and a negative relationship with leverage but that was not statistically significant in his study of sri lankan manufacturing companies. on the other hand, aparna (2015) showed a negative relationship between profitability and firm size, leverage, and productivity in the case of the steel authority of india (sail).in their study of philippine banks, sufian and chong (2008) found that a copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 10 bank’s profitability is negatively affected by the size, credit risk, and expense preference behavior, while positively affected by non-interest income and capitalization. al-jafari and samman (2015) found a positive association of firm size, fixed assets, growth, and working capital on profitability which was significant and a negative association between profitability and financial leverage for the industrial firms in oman. maroa and kioko (2016) found that there exists significant positive relationship between liquidity, firm size, and profitability whereas an insignificant positive relationship is experienced between leverage and profitability. sivathaasan, tharanika, sinthuja, and hanitha (2013) looked into the relationship of capital structure, firm size, working capital, growth rate, and non-debt tax shield with the profitability of the sri lankan manufacturing companies. they found that profitability is significantly related to capital structure and non-tax shield, whereas it has no significant relationship with firm size. a study of malaysian construction companies conducted by zaid, wan mud, and zulqernain (2014) came with a result of a positive association among firm size, liquidity on the profitability which was significant. after analyzing the foreign and local banks in ghana, gyamerah and amoah (2015) found that cost management and profitability have a significant negative relationship while bank size and credit risk have a significant positive relationship with profitability. additionally, the study by prempeh, sekyere, and amponsah addy (2018) on the manufacturing firms of the said country stated that leverage and interest rates have a negative relationship with profitability while liquidity and firm size have a significantly positive relationship with profitability. moreover, tangibility and gdp have shown no significant relationship with profitability. egbunike and okerekeoti (2018) explored that, in the case of nigerian manufacturing firms, firm size, leverage, and liquidity have a positive relationship with profitability which was significant. furthermore, after studying the macroeconomic variables, they found a positive correlation between gdp growth and profitability, but a negative correlation between inflation rate and profitability, both of which were significant. the researchers didn’t find any significant impact on interest rate and exchange rate. highlighting the nigerian economy, another study by ehi-oshio, adeyemi, and enofe (2013) found that, firm size and financial leverage have a positive relationship with corporate profitability. prasetyantoko and rachmadi (2008) disclosed a bigger impact of macro-factors than firm-level factors on the corporate performance of indonesian firms, probably due to the 1997 great crisis. additionally, this study discovered a positive relationship between firm size and profitability. khan, shamim, and goyal (2008) explored that firm size and growth have a positive association and leverage has a negative association with profitability in the indian telecom industry. vatavu (2014) examined that tangibility, business risk, inflation rate, financial crisis, and the level of taxation are negatively related to profitability, and liquidity is positively related to the same in the context of romanian companies. age, as a firm-specific factor, got attention from many researchers, such as (coad, segarra-blasco, & teruel, 2010; hirsch & hartmann, 2014; pervan & curak, 2016), identified a signal of a decline in profitability as the firm's age increases. on the contrary, majumdar (1997) found that a firm's size and age are positively related to its productivity and profitability. pervan, pervan, and curak (2019) came up with a positive relationship of age and inflation rate with the profitability of the croatian manufacturing industry. some of the few pioneers to study on the firm performance based on firm-specific and industry-specific effects are schmalensee (1985), hansen and wernefelt (1989), and mauri and michaels (1998). these subjects have also been examined by akben-selcuk (2016), mirza and javed (2013), dogan (2013), tailab (2014), al-jafari and samman (2015), and batra and kalia (2016) in the recent years. researchers conducted various studies to identify the association of firm size with profitability. some of them are fukao (2006), asimakopoulos, samitas and papadogonas (2009), nunes, serrasqueiro, & sequeira (2009), stierwald (2010), yazdanfar (2013), zaid et al. (2014), and pratheepan (2014). in their pecking order theory, myers and majluf (1984) explained that leverage is inversely related to profitability. this view has also been confirmed by kester (1986), titman and wessels (1988), rajan and zingales (1995), samarakoon (1999), booth, aivazian, demirgusc-kunt, and maksimovic (2001), and al-jafari and samman (2015). on the contrary, ifeduni and charlse (2018) found higher profitability because of higher gearing (debt).expense to revenue ratio has significant negative impact on profitability found by burja (2011). in contrast, the trade-off, free cash flow (jensen, 1986), signaling, and agency theories, showed the existence of a positive relationship between leverage and profitability, which was later been confirmed by the study of sivathaasan et al. (2013). in the paper of nanda and panda (2018), it has been found that corporate profitability is mostly affected by various firm-level elements, namely firm size, liquidity, leverage, etc. rather than the macroeconomic indicator. after researching the indian corporate sector from the circumstance of the pre and post-crisis performances, they found a positive association between firm size and profitability. the findings were similar to the studies conducted by nunes et al. (2009), asimakopoulos et al. (2009), stierwald (2010), yazdanfar (2013), and pratheepan (2014). this was said to be the result of economies of scale. this study also found a negative relationship between leverage and profitability which was significant, like the study conducted by nunes et al. (2009). copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 11 demir (2007) showed that the real interest rate has a significant negative impact on the profitability of the manufacturing industry. but alper and anbar (2011) found that the real interest rate affects the performance of banks positively. all of the above findings and pieces of evidence are the perspective from foreign countries, whereas, we have found very few studies focusing on the above-mentioned aspect from the context of manufacturing companies from bangladesh and the cement industry to be specific. nevertheless, this study addressed various factors which seemed to have a substantial influence on profitability; and also considered the fact that, due to inefficient market and change of time, risk factor also changes. moreover, certain factors affect the profitability of manufacturing companies of bangladesh in particular, such as the size of the firm, the expense to revenue ratio, maintaining leverage in capital structure, and learning effect over the age of business operations as firm-specific factors and inflation, gdp growth rate, and real interest rate as macroeconomic factors. therefore, the research was necessary to reveal the above factors. the paper has presented the impact of control variables on the dependent variable (roa). in addition to that, it also exhibited the coefficient of determination among seven independent variables on the dependent variable. this study has been attempted to report this gap. 3. research methodology 3.1 data and variables all the companies listed under the cement industry on dse (dhaka stock exchange) have been chosen for conducting this study. the data period for conducting the study has been chosen for the last 19 years (2000-2018) and the total no. of observations for the study is 106. the dataset is an unbalanced panel dataset as some companies listed on the stock exchange in later years. macroeconomic data were collected from world bank portal (the world bank data, 2020). firm-specific data were collected from the annual reports of the companies. 3.2 dependent variable  roa: roa (returns on assets) has been chosen in this study as the dependent variable for measuring profitability. according to conducted studies, roa is a better estimation of profitability as it also considers financial leverage. through roa of a company, the net income to the total assets of that business firm for a certain period can be easily understood. because of that reason, each business prefers to secure a higher roa as an implication of better efficiency of using the assets of the company. roa (return on assets) has been calculated as net income divided by total assets. 3.3 independent variables 3.3.1 firm-specific factors  firm size: the natural log of total assets of each company has been chosen as one of the firm-specific independent variables. the percentage change in assets gives a clear view of understanding the impact and previous studies followed a similar approach too. the size of a firm creates a huge impact on the profitability of the firm. because of higher size, a company gets more benefits to maximize its profit.  expense to revenue ratio: the expense to revenue ratio of a firm indicates the overall health of a business firm. a lower expense to revenue ratio indicates more profit potentiality of that business firm. thus lower expense to revenue ratio is desired because it indicates that the expenses are minimized in comparison with the revenues.  leverage: leverage indicates the usage of the total debt of a firm to its market value or the book value of the assets. the higher interest burden is created when a company absorbs more leveraged debt. leverage creates an active impact on the profitability of the business firm by using both equity and debt financing in the capital structure.  age: the age of a firm positively impacts on its operations because of higher efficiency in managing costs and increasing revenues. thus the age of the business firm is supposed to impact the firm's profitability positively. the year of commencement of business operations has been chosen as the beginning year of business. thus age has been calculated from the year of commencement of business operations. the natural log of the age of each business firm has been taken as an independent variable for the study. 3.3.2 macroeconomic factors  inflation: inflation creates an influence on all aspects of the economy. the business activities of any business firm are impacted by inflation. inflation causes an increase in interest rate when there is a sharp rise in the inflation rate. thus the profitability of the business firm is negatively impacted.  gdp growth rate: the economic growth of any economy can be understood by the gdp growth rate. it provides an understanding of the market potential from the macro aspect. gdp growth rate creates an active influence on the profitability of the business firm. copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 12  real interest rate: the deduction of the inflation rate from the nominal interest rate indicates the real interest rate. it is one kind of measurement to understand the positive change in the purchasing power of the lender while receiving the money from borrowers' repayment of interest and loan. higher real interest rate increases the cost of borrowing of the business firms which reduces the profitability of the firms. 3.3.3 operational definition table 1. list of operational variables variable notation definition dependent variable return on assets roa net income / total asset independent variables firm size ln firm size natural log of total asset expense to revenue expense to revenue operating expense / sales revenue leverage leverage total liability/ total asset age ln age natural log of age inflation inflation (cpit cpit-1)/ cpit-1 gdp growth rate gdp growth rate (gdpt gdpt-1)/gdpt-1 real interest rate real interest rate nominal interest rate – inflation rate 3.4 the hypotheses the hypotheses, which has been assumed for the seven independent variables. if the variable is statistically significant, we will accept the hypothesis for this variable. the coefficient sign for each variable indicates our expectation. again, this hypothesis can be accepted partially if the variable is mildly insignificant with an expected coefficient. for any case out of these, the hypothesis will be rejected. table 2. list of hypotheses hypothesis description h1 profitability is positively and significantly correlated to firm size h2 profitability is negatively and significantly correlated to expense to revenue ratio h3 profitability is negatively and significantly correlated to leverage h4 profitability is positively and significantly correlated to the age of a firm h5 profitability is negatively and significantly correlated to inflation h6 profitability is positively and significantly correlated to gdp growth rate h7 profitability is negatively and significantly correlated to the real interest rate 3.5 model of the study to understand the relationship between the dependent variable and the independent variables, the study was attempted. the model of this study is given below: roa= β0 + β1*ln firm size + β2*expense to revenue + β3*leverage + β4*ln age + β5*inflation + β6*gdp growth rate + β7*real interest rate + εit (1) the roa (return on assets) in the above-mentioned equation indicates the profitability; β0 indicates the constant of this model. β1, β2... β9 are the coefficients to be estimated according to the variables and εi indicates the error term of this equation and the t indicates the specific period. copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 13 4. empirical results and discussion 4.1 descriptive statistics the descriptive statistics that include average, minimum, maximum, and standard deviation of all variables is represented in the following table: table 3. descriptive statistics variable mean st. dev. minimum maximum roa 5.74% 0.17 -46% 160% firm size (in bdt million) 4193 4157 17 19714 ln firm size 21.24 1.92 16.66 23.7 expense to revenue 7.67% 0.13 1.00% 131% leverage 0.58 0.21 0.17 0.98 age (in years) 21.09 12.97 2 55 ln age 2.87 0.62 0.69 4.01 inflation 6.38% 0.02 2.01% 11.40% gdp growth rate 6.05% 0.01 3.83% 7.86% real interest rate 5.78% 0.02 3.07% 9.26% 4.2 correlation the level of correlation among the variables used in multivariate regression analysis is shown in table 4. the correlation between the variables is not so strong which suggests that there exists no multicollinearity problem among the variables. table 4. correlation matrix variable [1] [2] [3] [4] [5] [6] [7] [8] roa 1.00 ln firm size 0.05 1.00 expense to revenue -0.07 -0.28 1.00 leverage -0.25 -0.06 0.05 1.00 ln age -0.03 -0.01 -0.11 0.33 1.00 inflation -0.25 -0.03 0.00 0.12 0.18 1.00 gdp growth rate -0.03 0.13 0.14 0.02 0.32 0.28 1.00 real interest rate 0.24 -0.12 -0.10 -0.10 -0.36 -0.43 -0.72 1.00 4.3 multicollinearity the vif (variance inflation factor) is a great measurement tool for multicollinearity among the variables. the mean vif of the test shown in table 5 is 1.54, which indicates that multicollinearity is not a problem for the dataset of this study. table 5. multicollinearity variable vif 1/vif ln firm size 1.15 0.87 expense to revenue 1.19 0.84 leverage 1.15 0.87 ln age 1.36 0.74 inflation 1.26 0.79 copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 14 gdp growth rate 2.21 0.45 real interest rate 2.48 0.40 mean vif 1.54 4.4 methods for data analysis the dataset for our model is a panel dataset. between the fixed effects model and the random-effects model, we will analyze which model is appropriate for our study by conducting the hausman test. stata/mp 13 software is used for conducting and specifying this study. the acceptance level of significance is 1%, 5%, and 10% based on the outcome. 4.5 results and discussions for deciding the appropriate model between the fixed effects model and the random-effects model, the hausman test has been applied. table 6. hypothesis for the hausman test hypothesis description null random effects model is appropriate alternative random effects model is not appropriate the output of the hausman test is given in the table below: table 7. hausman test results for hausman test chi-square statistic 2.6 chi-square deg. f. 7 prob. 0.919 from the result of the hausman test, the null hypothesis cannot be rejected. thus the estimated model for this study will be based on random effects. table 8. estimation using random effects variable coefficients std. err. z-statistic p-value constant -0.3988 0.31 -1.27 0.205 ln firm size 0.0027 0.01 0.32 0.753 expense to revenue -0.0457 0.13 -0.36 0.718 leverage -0.1870 0.08 -2.38 0.017** ln age 0.0350 0.03 1.19 0.234 inflation -1.2634 0.83 -1.52 0.129 gdp growth rate 4.3450 2.44 1.78 0.075* real interest rate 4.0040 1.57 2.55 0.010*** note. ***significant at 1%, **significant at 5%, *significant at 10%. from the output given above, it is found that real interest rate, leverage, and gdp growth rate are statistically significant at 1%, 5%, and 10% level of significance consecutively. for firm-specific factors, firm size and age have a positive impact on roa where expense-to-revenue and leverage have negative impacts on roa. for macroeconomic variables; we have found that roa is influenced by real interest rate and gdp growth rate positively and by inflation negatively. the r-squared copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 15 value is within 18.09%, between 38.82%, and overall 17.69%. the p-value of goodness of fit test (chi-square) is 0.0037 which is less than 0.05 indicates the model is strong. table 9. decisions of hypotheses acceptance or rejection hypothesis variable obtained significance expected impact obtained impact result h1 ln firm size insignificant positive positive accepted h2 expense to revenue insignificant negative negative accepted h3 leverage significant negative negative accepted h4 ln age insignificant positive positive accepted h5 inflation insignificant negative negative accepted h6 gdp growth rate significant positive positive accepted h7 real interest rate significant negative positive rejected through conducting the study, we found that firm size, age, real interest rate, and gdp growth rate have positive impacts on profitability. expense-to-revenue, leverage, and inflation have negative impacts on profitability. the firm size helps the firm to increase its profitability by expanding its capacity more efficiently. the findings of the study show positive impact on profitability supporting prasetyantoko and rachmadi (2008), khan et al. (2018), ehi-oshio et al. (2013), zaid et al. (2014), and al-jafari and samman (2015) but varying from goddard, tavakoli, and wilson (2005) and aparna (2015). the higher expense to revenue ratio of the firm indicates lower profitability. expense to revenue ratio has negative impact on profitability partially supporting (burja, 2011). leverage in this study is calculated by dividing total liabilities to the total assets of the firm. the result show significant negative impact on profitability as higher liability in a business firm reduces profitability supporting khan et al. (2018), aparna (2015), prempeh et al. (2018) but varying from ehi-oshio et al. (2013), maroa and kioko (2016), and egbunike and okerekeoti (2018). business firm learns how to minimize costs and maximize profits with time. thus, the age of the firm creates an active impact on profitability. the positive impact of age on profitability supports majumdar (1997) but varies from coad et al. (2010), hirsch and hartmann (2014), and pervan & curak (2016). higher inflation causes an increase in the nominal interest rate and causes an increase in the cost of borrowing. thus, the findings also indicate a negative impact on profitability as inflation leads to a reduction on the profitability of the firms. the result supports vatavu (2014) and egbunike and okerekeoti (2018) but varies from pervan et al. (2019) when an economy grows as per gdp, it creates more opportunities for the firms to make more profits by expanding the market demand of the products through infrastructure and development projects. thus the impact of gdp growth rate is significantly positive on profitability of the cement industry supporting egbunike and okerekeoti (2018), hassan and muniyat (2019). real interest has significant positive impact on profitability supporting demir (2007) but varying alper and anbar (2011). 5. conclusion after conducting the study through secondary data, the findings revealed that leverage as a firm-specific variable and gdp growth rate and real interest rate as macroeconomic variables have significant impact on the profitability. the results show that firm size, age, gdp growth rate, and real interest rate have positive impact while expense to revenue ratio, leverage, and inflation have negative impact on the profitability of the firms under cement industry of bangladesh. thus after conducting a thorough analysis of the factors influencing the profitability of the said industry, the study found a significant relationship regarding both firm-specific and macro-economic factors. the cement industry of bangladesh has become one of the fastest growing sectors in recent years. further research may be conducted to measure the impacts of firm-specific and macroeconomic factors in determining the profitability for other industries too. in this study, only listed companies under the stock exchanges have been considered. hence, all cement companies in bangladesh can be considered for further study by other researchers. 6. recommendations by considering the statistical significance, managers and policymakers of the cement industry need to take essential actions regarding the enhancement of financial performance. as in the recent years, multinational cement companies are expanding their capacity despite having unutilized facilities in anticipation of increasing demands, the government should take necessary steps to promote development in urbanization, real estate development, and government projects by local cement companies. business firms under cement industry should prefer equity financing instead of debt financing. business firms should design their sales copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 16 forecasts according to the gdp growth rate movement and the real interest rate in the economy as both factors have significant positive impact on profitability. new technologies need to be adopted to improve the operational efficiencies of the firms. references agustinus, p., & rachmadi, p. 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(pp. 113). kuala lumpur: minister of works malaysia. appendix a list of all the listed cement companies on dse and chosen data period for the study companies year of commencement data period 1. aramit cement limited 1963 2000-2018 2. confidence cement ltd. 1991 2000-2018 3. heidelberg cement bangladesh ltd. 1998 2000-2018 4. lafargeholcim bangladesh limited 1997 2006-2018 5. m i cement factory limited 1994 2009-2018 6. maghna cement mills ltd. 1992 2000-2018 7. premier cement mills limited 2001 2012-2018 appendix b data set for the study s.l no. company year roa ln age ln firm size expense to revenue leverage inflation gdp growth real int. rate 1 1 2000 1.60 3.61 19.80 0.056 0.509 0.022 0.053 0.090 2 1 2001 0.05 3.64 19.91 0.022 0.543 0.020 0.051 0.093 3 1 2002 -0.11 3.66 19.86 0.040 0.616 0.033 0.038 0.084 4 1 2003 -0.14 3.69 19.80 0.063 0.720 0.057 0.047 0.059 5 1 2004 -0.46 3.71 19.70 0.074 0.891 0.076 0.052 0.056 6 1 2005 -0.06 3.74 19.87 0.027 0.980 0.070 0.065 0.058 7 1 2006 0.01 3.76 20.26 0.026 0.603 0.068 0.067 0.055 8 1 2007 0.03 3.78 20.07 0.031 0.953 0.091 0.071 0.058 9 1 2008 0.00 3.81 20.30 0.035 0.954 0.089 0.060 0.047 10 1 2009 0.08 3.83 20.39 0.038 0.907 0.054 0.050 0.061 11 1 2010 0.08 3.85 20.70 0.044 0.865 0.081 0.056 0.047 12 1 2011 0.04 3.87 20.97 0.051 0.858 0.114 0.065 0.051 13 1 2012 0.03 3.89 21.16 0.047 0.850 0.062 0.065 0.053 14 1 2013 0.03 3.91 21.18 0.063 0.827 0.075 0.060 0.060 copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 19 15 1 2014 0.00 3.93 21.35 0.075 0.719 0.070 0.061 0.069 16 1 2015 0.00 3.95 21.49 0.078 0.765 0.062 0.066 0.055 17 1 2016 0.01 3.97 21.68 0.072 0.813 0.055 0.071 0.034 18 1 2017 -0.03 3.99 21.93 0.093 0.887 0.057 0.073 0.031 19 1 2018 0.05 4.01 20.84 0.168 0.168 0.055 0.079 0.038 20 2 2000 0.19 2.20 20.45 0.051 0.223 0.022 0.053 0.090 21 2 2001 0.16 2.30 20.72 0.045 0.305 0.020 0.051 0.093 22 2 2002 -0.02 2.40 21.22 0.080 0.267 0.033 0.038 0.084 23 2 2003 0.01 2.48 21.14 0.062 0.622 0.057 0.047 0.059 24 2 2004 -0.03 2.56 20.66 0.071 0.351 0.076 0.052 0.056 25 2 2005 0.02 2.64 20.78 0.038 0.412 0.070 0.065 0.058 26 2 2006 0.03 2.71 20.97 0.031 0.270 0.068 0.067 0.055 27 2 2007 0.05 2.77 20.82 0.031 0.377 0.091 0.071 0.058 28 2 2008 -0.02 2.83 20.87 0.030 0.456 0.089 0.060 0.047 29 2 2009 0.06 2.89 21.57 0.036 0.196 0.054 0.050 0.061 30 2 2010 0.07 2.94 21.90 0.036 0.195 0.081 0.056 0.047 31 2 2011 0.05 3.00 22.04 0.031 0.327 0.114 0.065 0.051 32 2 2012 0.07 3.04 22.13 0.029 0.389 0.062 0.065 0.053 33 2 2013 0.08 3.09 22.25 0.035 0.359 0.075 0.060 0.060 34 2 2014 0.04 3.14 22.34 0.039 0.431 0.070 0.061 0.069 35 2 2015 0.06 3.18 22.44 0.045 0.443 0.062 0.066 0.055 36 2 2016 0.07 3.22 22.55 0.093 0.468 0.055 0.071 0.034 37 2 2017 0.06 3.26 22.77 0.131 0.510 0.057 0.073 0.031 38 2 2018 0.05 3.30 22.83 0.077 0.500 0.055 0.079 0.038 39 3 2000 0.12 0.69 21.28 0.069 0.412 0.022 0.053 0.090 40 3 2001 0.12 1.10 21.30 0.064 0.351 0.020 0.051 0.093 41 3 2002 0.03 1.39 21.26 0.097 0.308 0.033 0.038 0.084 42 3 2003 -0.01 1.61 22.13 0.105 0.583 0.057 0.047 0.059 43 3 2004 0.00 1.79 22.14 0.098 0.589 0.076 0.052 0.056 44 3 2005 0.03 1.95 22.19 0.083 0.574 0.070 0.065 0.058 45 3 2006 0.13 2.08 22.14 0.052 0.439 0.068 0.067 0.055 46 3 2007 0.18 2.20 22.36 0.057 0.446 0.091 0.071 0.058 47 3 2008 0.10 2.30 22.49 0.053 0.438 0.089 0.060 0.047 48 3 2009 0.14 2.40 22.52 0.053 0.424 0.054 0.050 0.061 49 3 2010 0.14 2.48 22.69 0.060 0.338 0.081 0.056 0.047 50 3 2011 0.09 2.56 22.80 0.058 0.343 0.114 0.065 0.051 51 3 2012 0.14 2.64 22.94 0.051 0.314 0.062 0.065 0.053 52 3 2013 0.14 2.71 23.10 0.067 0.301 0.075 0.060 0.060 53 3 2014 0.12 2.77 23.04 0.069 0.359 0.070 0.061 0.069 54 3 2015 0.14 2.83 23.00 0.081 0.409 0.062 0.066 0.055 55 3 2016 0.15 2.89 23.04 0.087 0.451 0.055 0.071 0.034 copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 20 56 3 2017 0.09 2.94 22.89 0.099 0.462 0.057 0.073 0.031 57 3 2018 0.09 3.00 22.74 0.501 0.515 0.055 0.079 0.038 58 4 2006 -0.05 2.20 16.66 1.315 0.750 0.068 0.067 0.055 59 4 2007 -0.06 2.30 16.69 0.222 0.816 0.091 0.071 0.058 60 4 2008 0.01 2.40 16.70 0.079 0.808 0.089 0.060 0.047 61 4 2009 0.06 2.48 16.67 0.067 0.744 0.054 0.050 0.061 62 4 2010 -0.09 2.56 16.70 0.299 0.845 0.081 0.056 0.047 63 4 2011 -0.12 2.64 16.74 0.073 0.652 0.114 0.065 0.051 64 4 2012 0.14 2.71 16.72 0.078 0.557 0.062 0.065 0.053 65 4 2013 0.13 2.77 16.76 0.094 0.420 0.075 0.060 0.060 66 4 2014 0.14 2.83 16.80 0.080 0.331 0.070 0.061 0.069 67 4 2015 0.08 2.89 16.85 0.094 0.306 0.062 0.066 0.055 68 4 2016 0.07 2.94 16.86 0.008 0.267 0.055 0.071 0.034 69 4 2017 0.02 3.00 16.89 0.120 0.291 0.057 0.073 0.031 70 4 2018 0.03 3.04 17.11 0.105 0.421 0.055 0.079 0.038 71 5 2009 0.12 2.71 21.14 0.024 0.513 0.054 0.050 0.061 72 5 2010 0.15 2.77 21.55 0.056 0.415 0.081 0.056 0.047 73 5 2011 0.06 2.83 22.67 0.055 0.282 0.114 0.065 0.051 74 5 2012 0.06 2.89 23.02 0.042 0.452 0.062 0.065 0.053 75 5 2013 0.07 2.94 23.00 0.046 0.428 0.075 0.060 0.060 76 5 2014 0.06 3.00 23.15 0.043 0.500 0.070 0.061 0.069 77 5 2015 0.05 3.04 23.21 0.055 0.513 0.062 0.066 0.055 78 5 2016 0.05 3.09 23.37 0.056 0.525 0.055 0.071 0.034 79 5 2017 0.04 3.14 23.61 0.065 0.604 0.057 0.073 0.031 80 5 2018 0.02 3.18 23.70 0.063 0.639 0.055 0.079 0.038 81 6 2000 0.08 2.08 21.37 0.047 0.800 0.022 0.053 0.090 82 6 2001 0.08 2.20 21.56 0.032 0.794 0.020 0.051 0.093 83 6 2002 0.03 2.30 21.66 0.035 0.801 0.033 0.038 0.084 84 6 2003 0.01 2.40 21.61 0.018 0.777 0.057 0.047 0.059 85 6 2004 0.01 2.48 21.59 0.020 0.738 0.076 0.052 0.056 86 6 2005 0.03 2.56 21.67 0.016 0.740 0.070 0.065 0.058 87 6 2006 0.02 2.64 21.59 0.021 0.778 0.068 0.067 0.055 88 6 2007 0.04 2.71 21.78 0.023 0.784 0.091 0.071 0.058 89 6 2008 0.01 2.77 21.79 0.028 0.803 0.089 0.060 0.047 90 6 2009 0.04 2.83 21.92 0.038 0.797 0.054 0.050 0.061 91 6 2010 0.01 2.89 22.01 0.035 0.815 0.081 0.056 0.047 92 6 2011 0.02 2.94 22.14 0.045 0.836 0.114 0.065 0.051 93 6 2012 0.03 3.00 22.15 0.051 0.818 0.062 0.065 0.053 94 6 2013 0.03 3.04 22.15 0.042 0.821 0.075 0.060 0.060 95 6 2014 0.02 3.09 22.09 0.047 0.793 0.070 0.061 0.069 96 6 2015 0.02 3.14 22.07 0.062 0.811 0.062 0.066 0.055 copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 21 97 6 2016 0.01 3.18 22.24 0.052 0.826 0.055 0.071 0.034 98 6 2017 0.01 3.22 22.27 0.064 0.824 0.057 0.073 0.031 99 6 2018 0.01 3.26 22.65 0.063 0.875 0.055 0.079 0.038 100 7 2012 0.03 2.40 22.61 0.047 0.658 0.062 0.065 0.053 101 7 2013 0.06 2.48 22.86 0.017 0.621 0.075 0.060 0.060 102 7 2014 0.05 2.56 23.01 0.050 0.663 0.070 0.061 0.069 103 7 2015 0.04 2.64 23.03 0.055 0.663 0.062 0.066 0.055 104 7 2016 0.06 2.71 23.11 0.066 0.613 0.055 0.071 0.034 105 7 2017 0.05 2.77 23.07 0.070 0.586 0.057 0.073 0.031 106 7 2018 0.07 2.83 23.33 0.052 0.664 0.055 0.079 0.038 copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). copyright © cc-by-nc 2020, cribfb | asfbr asian finance & banking review; vol. 4, no. 1; 2020 issn 2576-1161 e-issn 2576-1188 published by centre for research on islamic banking & finance and business, usa 17 implications of non-performing loans on the nigerian deposit money banks saliu hakeem tomi m.sc department of banking and finance faculty of management sciences kogi state university p.m.b 1008, anyigba, kogi state, nigeria e-mail:tomisaliu@gmail.com idih ogwu emmanual phd department of banking and finance faculty of management sciences kogi state university p.m.b 1008, anyigba, kogi state, nigeria e-mail: emmite1010@gmail.com adewole joseph adeyinka phd department of banking and finance faculty of social and management sciences adekunle ajasin university p.m.b 001, akungba akoko, ondo state, nigeria e-mail: princeadeyinkaadewolej@gmail.com abstract the study examined the arguments and counterarguments within the scientific discussion on the implications of non-performing loans on the nigerian deposit money banks. the main objective is to examine the effect of non-performing loan on the performance of deposit money banks in nigeria. data were sourced from central bank of nigeria statistical bulletin. a systematization literary approach for data analysis was auto regression distribution lag (ardl) bound tests. findings revealed that there exist a long run significant relationship between non performing loan and the performance of deposit money banks in nigeria. it was revealed that persistence increase in non-performing loans results in poor performance of deposit money banks in nigeria. it was also discovered that non performing loan reduces deposit money banks return on asset. the study therefore recommends that deposit money banks should employ competent risk managers that always use their skills to reduce the incident of non-performing loans in the nigerian deposit money banks. the study also recommends that deposit money banks in nigeria should always monitor the end-use of funds given to their customers in order to curb the incident of fund diversion which may result in non-performing loan. keywords: non-performing loan, performance, return on assets, economic growth rate, credit risk management. 1. introduction the increasing documentations of non-payment of either loan principals or loan interest in at least 90 days are alarming and most responsible for financial sector problems experienced in nigeria (adeyemi, 2011; benji, 2013; samayo, 2010). hamisu (2011) posited that the banks and other economic industries drive and played key part in the socio-economic growth in the nigeria economy where they provide multiple economic supports that contribute positively to the survival of the nigerian economy. however, many banks in nigeria today are making huge losses due to the problem of non-performing loans. clearly, this is a negative impact against the banks' intermediate role in economic growth. the rate at which these organizations lend credit to companies and certain individuals increases the nation's economic growth rate (kolapo, ayeni, oke, 2012). nigeria banking system is regulated and monitored by the bank of nigeria with the banking act made by the parliament of nigeria. the acts has regulations which guide the activities of all banks and some other financial institutions in the country. the main objective is to examine the effect of non-performing loan on the performance of deposit money bank in nigeria. the specific objectives are to ascertain the existence of long run relationship between the non-performing loan and deposit money banks performance in nigeria, to find out the short run and long run impact of non-performing loan on mailto:tomisaliu@gmail.com mailto:emmite1010@gmail.com mailto:princeadeyinkaadewolej@gmail.com copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 18 performance of deposit money banks in nigeria, to identify the speed of adjustment at which deposit money banks adjust to long run equilibrium as a result as a result of change in nonperforming loan and to evaluate the proportion of variation of the performance of deposit money bank explained by non-performing loan. the research questions formulated to guide the study are; what is the long run relationship between the nonperforming loan and deposit money banks performance in nigeria? what is the short run and long run impact of nonperforming loan on performance of deposit money banks in nigeria? to what extent is the speed of adjustment at which deposit money banks adjust to long run equilibrium as a result of change in nonperforming loan? what is the proportion of variation of the performance of deposit money bank explained by non-performing loan? 2. methodology this study employed time series secondary data covering the period from 1986 to 2018. data was sourced from cbn statistical bulletin. the study adopted auto regression distribution lag (ardl) bound tests to analyze the long run relationship that exist between non performing loan and dmb performance in nigeria while the error correction model was used to evaluate the proportion of variation of the dependent variable explained by each of the independent variables. the variance decomposition was adopted to capture the proportion of variation of the dependent variable explained by each of the independent variables while some diagnostic test was carried to test the reliability and predictability of the model. 2.1 model specification roa = f (npl, bdb, bcrid, tdb) roat = b0 + b1lnnplt + b2lnbcdt + b3lntdbt + b4bcridt + ut b1<0, b2>0, b3>0, b4>0 and b5>0. roat = b0 + ∑ b𝑛 𝑡=𝑖 1 lnnplt +∑ b𝑛 𝑡=𝑖 2lnbcdt +∑ b𝑛 𝑡=𝑖 3lntdbt + ∑ b𝑛 𝑡=𝑖 4bcridt + ut the estimated short-run equation and the error correction term are roat = b0 + ∑ b𝑛 𝑡=𝑖 1 lnnplt +∑ b𝑛 𝑡=𝑖 2lnbcdt +∑ b𝑛 𝑡=𝑖 3lntdbt + ∑ b𝑛 𝑡=𝑖 4bcrid+ ecmt=i + ut many authors have used similar method to explain the issue of non-performing loan; mohammad, ammara, abrar and fareeha (2012) examined economic determinants of non-performing loans using correlation and regression analysis to analyze the impact of selected independent variables and the result reveals that interest rate, energy crisis, unemployment, inflation and exchange rate has a significant positive relationship with the non-performing loans of pakistan banking sector, while gdp growth rate has a significant negative relationship with the non-performing loans of pakistan banking sector. bofondi and ropele (2011) investigated the macroeconomic determinants of bad loans of italian banks for the period 1990-2010 using quarterly data and found that non-performing loans are positively associated with the unemployment rates, lending rates and negatively associated with the gdp growth rate. similarly, ekanayake and azeez (2015) viewed that the determinants of non-performing loans in certified commercial banks in sri lanka for the period 1999-2012 were explored and it was discovered that the level of non-performing loans can be attributed both to macroeconomic situations and to particular factors for banks. results of their study reveal that non-performing loans tend to increase with deteriorating bank efficiency and a positive correlation between loan asset ratio and non-performing loans occurred. they also observed that banks with high credit growth rates are associated with lower levels of non-performing loans, while larger banks incur loan defaults that are lower than smaller banks. however, the study found with regards to the macro economic variables, that non-performing loans vary negatively with growth rate of gdp, while inflation was positively related to the prime lending rate. 3. presentation of data bcd bcir npl roa tdp mean 84.01459 65.57019 14.56781 2.495662 12.46906 median 81.84000 66.15500 13.81500 2.332251 10.25000 maximum 106.7700 81.37000 37.25000 4.120000 22.54000 minimum 61.22000 55.69000 2.120000 0.090000 6.070000 std. dev. 12.65723 6.762784 9.647148 0.777410 4.976759 skewness 0.252767 0.270515 0.563522 -0.366385 0.280608 copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 19 kurtosis 2.107124 2.220614 2.678805 4.584726 1.551357 jarque-bera 1.403723 1.200207 1.831195 4.064411 3.218038 probability 0.495662 0.548755 0.400277 0.131046 0.200084 sum 2688.467 2098.246 466.1700 79.86119 399.0100 sum sq. dev. 4966.371 1417.793 2885.092 18.73536 767.8121 observations 32 32 32 32 32 source: authors computation e-view 9.0 the tables depicts the descriptive statistics of the variables a mean of 84% of the bank deposit is granted as loan in which 14% of such loan turn bad and non performing to achieve a mean return on asset of 2.49 the maximum npl during the period is 37.25 while the minimum npl is 2.12. the npl varies from its mean by a standard deviation of 9.64. 3.1 stationary test source: authors computation e-view 9.0 the result above shows the level of stationary of the different variables. the table shows that lnbcir and lnroa are stationary at levels while lnnpl, lnbcd and lntdp are stationary at first difference. since the variables are stationary at level and first difference we establish the presence of stationary and adopt the autoregressive distributed lag model (ardl). 3.2 ardl bound test the f-statistics calculated for all underlined variables fall outside the critical bounds at the 1 and 5 percent levels of significance. the calculated f-statistic is higher than the upper bound critical value at 99% level of significance, so there is need to reject the null hypothesis which states that there is no cointegration, which suggests that the variables under consideration are cointegrated and they have the long-run relationship hence conclude that there exist the presence of long run relationship among nonperforming loan and the performance of deposit money bank in nigeria. short run and long run estimate cointeq = lnroa (-0.0198*lntdp + 0.0916*lnbcd -0.8877*lnbcir +0.2239*lnnpl + 1.5775 ) long run coefficients variable coefficient std. error t-statistic prob. lntdp -0.019837 0.171690 -0.115543 0.9092 lnbcd 0.091566 0.483005 0.189577 0.8516 lnbcir -0.887740 0.997051 -0.890366 0.3839 variables adf statistics 1% 5% 10% probability decision lnroa -5.181152 -3.653730 -2.957110 -2.617434 0.0002 1(0) lnnpl -5.325477 -3.724070 -2.986225 -2.632604 0.0001 1(1) lnbcd -3.208560 -3.724070 -2.986225 -2.632604 0.0314 1(1) lntdp -3.173502 -3.724070 -2.986225 -2.632604 0.0317 1(1) lnbcir -3.745093 -3.653730 -2.957110 -2.617434 0.0080 1(0) null hypothesis: no long-run relationships exist test statistic value k f-statistic 8.587291 4 critical value bounds significance i0 bound i1 bound 10% 2.45 3.52 5% 2.86 4.01 2.5% 3.25 4.49 1% 3.74 5.06 copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 20 lnnpl -0.223905 0.077448 -2.891041 0.0090 c 1.577451 2.177796 0.724334 0.4772 ecm -1.776328 0.308669 -5.754791 0.0000 `the result above shows the long run estimate of the variables. the tables show that only non-performing loan has significant effect on bank performance in the long run. this might be due to the fact that the amount of nonperforming loan measures the quality of bank assets (tseganesh, 2012). the effect of non-payment of due debts on banks‟ profitability can be identified with a possible bank failure, barrier to further lending, reduction in profit level and negative economic growth in the society. hence a unit percentage increase in non-performing loan will lead to 22% reduction in the return of asset in the long run. short run coefficient equation: error correction model short run coefficients variable coefficient std. error t-statistic lntdp 0.024720 0.08119 0.30447 lnbcd -0.010515 0.02432 -0.4323 lnbcir -0.021908 0.04150 -0.52797 lnnpl -0.597116 0.27759 -2.15106 c -0.009 0.03255 -0.277 r-squared = 0.471269 adj. r2 = 0.233 durbin watson= 1.84 source: authors computation from eview 9.0 the short-run dynamics among the variables are explored by employing error correction mechanism (ecm). error correction model explains the speed of adjustment in restoring the equilibrium in the dynamic model with a negative sign. bannerjee , dolado, and mestre (1998) also observe that a significant ecm is evidence that a stable long-term relationship exists. table above shows the result of ecm in terms of changes in return on asset to change in other variables. the magnitude of the ect coefficient of -1.77 at 5 percent level of significance shows that the speed of adjustment towards long-run equilibrium is very high, that is, there is 177 percent increase over the previous year. the short run dynamics further affirm the long run relationship that bank credit ratio to total deposit bcd, total financial system deposit and bank cost to income ratio has no significant impact on the return on asset in the short run also but only the non-performing loan exhibited a negative significant impact on return on asset. diagnostic test test f statistics probability breusch-godfrey serial correlation lm test 3.648037 0.00000 heteroscedasticity(arch) 17.3412 f 1,28) 0.0096 heteroscedasticity(breuschpagangodfrey 20.84385 0.0468 normality test (jarquebera) 117.58 0.00000 source: authors computation from eview 9.0 diagnostic tests such as breuschgodfrey serial correlation lm test, breusch-pagan-godfrey heteroskedasticity test and jacque-bera normality test. these tests show that there is no serial correlation, presence of homoscedastic and normal distribution. hence, the model is line with the econometric properties and the results are suitable for reliable interpretation and policy implication. 3.3 impulse response function this describes the evolution of a model’s variables in reaction to a shock in one or more variables. this feature allows tracing the transmission of a single shock within an otherwise noisy system of equations and, thus, makes them very useful tools in the assessment of economic policies. copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 21 -.4 -.2 .0 .2 .4 2 4 6 8 10 response of lnroa to lnnpl response to cholesky one s.d. innovations the result above shows the response of return on asset to innovation from non-performing loan. this study shows that return on asset respond to non-performing loan although the period and the responds is relatively uniform. variance decomposition vd of lnroa: period s.e. lnroa lnbcd lnbcir lntdp lnnpl 1 0.313488 100.0000 0.000000 0.000000 0.000000 0.000000 2 0.350966 86.27910 3.386231 0.998066 5.743668 3.592938 3 0.436573 64.60282 4.201521 21.29085 4.921632 4.983175 4 0.476380 63.69035 5.752814 20.40146 5.611523 4.543850 5 0.500836 65.45655 5.557380 4.253990 5.076896 4.253990 6 0.524890 66.61772 6.218811 3.873575 4.625277 19.65519 7 0.550445 66.46396 7.945937 4.027573 4.400085 18.66462 8 0.575806 67.86450 8.331418 3.816965 4.026012 17.16244 9 0.595678 68.71249 8.552364 3.676716 3.768660 15.96110 10 0.617050 69.07802 9.030516 3.784593 3.512694 15.28977 source: authors computation from eview 9.0 the result of the variance decomposition above shows that total financial system deposit causes the highest variance in the return on asset in the 2nd period leading to the ratio of bank credit to total deposit contributing highest in the 3 rd period consequently this large bank credit turns bad leading to large contribution of npl in the 4th to the 10th period. 4. findings deposit money bank with an roa of 2.49% implies how profitable a deposit money bank is relative to its total assets. this shows that only 2.49% of the total asset of the deposit money banks is profitable therefore this low roa shows that deposit money banks is not making enough income from the use of its assets. hence deposit money bank can achieve a high roa either by boosting its profit margin or, more efficiently, by using its assets to increase sales. 14% of the total loan in deposit money banks turn bad and becomes non-performing as indicated in the result of the descriptive statistics. the rationale for this high npl cannot be far from the existence of high-interest rate, low gdp, poor credit appraisal, inflation, unemployment and improper lending disbursement to agriculture sector within the deposit money banks. however, the study confirms the presence of long run relationship among non-performing loan and the performance of deposit money bank in nigeria and affirms that only non-performing loan has significant effect on bank performance in the long run and the short run as well although the speed of adjustment of the explanatory variables are significant hence the speed of adjustment towards long-run equilibrium is very high, that is, there is 177 percent increase over the previous year. nonetheless, return on asset respond to non-performing loan although the period and the response is relatively uniform as indicated by the impulse response function while the variance decomposition of the study shows that total financial system deposit causes the highest variance in the return on asset in the 2nd period leading to the ratio of bank credit to total deposit contributing highest in the 3rd period consequently this large bank credit turns bad leading to large contribution of npl in the 4th to the 10th period. copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 22 5. conclusion the study concluded that persistence increase in non-performing loans results in poor performance of deposit money banks in nigeria. also, non-performing loan reduces deposit money banks return on asset. the study therefore recommends that deposit money banks should employ competent risk managers that always use their skills to reduce the incident of nonperforming loans in the nigerian deposit money banks. the study also recommends that deposit money banks in nigeria should always monitor the end-use of funds given to their customers in order to curb the incident of fund diversion which may result in non-performing loan. references abiola, i. & olausi, a. s. (2014). the impact of credit risk management on the commercial banks performance in nigeria. international journal of management and sustainability, 3(5), 295-306. ajayi, l. b. & ajayi, f. i. (2017). effects of credit risk management on performance of deposit money banks in nigeria. international journal of research in management & business studies, 4(3), 50-55. bofondi, m. & ropele, t. (2011). macroeconomic determinants of bad loans: evidence from italian conference, ineag, samos. ekanayake, e.m. n.n. & azeez a.a. (2015). determinants of nonperforming loans in licensed commercial banks: evidence from sri lank. asian economic and financial review. 5(6), 868-882 hamisu, s.k. (2011). credit risk and the performance of nigerian banks, department of accounting, ahmadu bello university, zaria, nigeria. iwedi, m. & onuegbu, o. (2014). credit risk and performance of selected deposits money banks in nigeria: an empirical investigation. european journal of humanities and social sciences, 31(1), 1684-1694. kolapo, t. f., ayeni, r. k. & oke, m. o. (2012).credit risk and commercial banks’ performance in nigeria: a panel model approach. australian journal of business and management research, 2(2), 31-38. muhammad, f., ammara s., abrar, h.c, & fareeha, k. (2012). economic determinants of nonperforming loans: perception of pakistan bankers. european journal of business and management. 4(2), 20-29. salas,v. & sanrina, k (2006) credit risk in two international setting : spainish commercial and savings bank. journal of finance services research, 22(3), 203-224. saba, i. kouser, r. & azeem, m. (2012). determinants of non-performing loans: case of us banking sector, international journal of banking and finance, 4(4), 479-488. sinkey, h., & greenwalt j. (1990). determinant of non-performing loans in guyana-research gate. warue, b. n. (2013). the effects of bank and macroeconomic factors on nonperforming loans in commercial banks in kenya: a comparative panel data analysis. advances in management and applied economics, 3(2), 135-164. appendix year lnnpl lnbcir lnbcd lnroa lntdp 1986 1.311754 1.85901 1.890086 0.372822 1.352954 1987 1.334454 1.864371 1.903416 0.370515 1.235528 1988 1.334454 1.869667 1.859978 0.368194 1.248709 1989 0.968483 1.874899 1.86976 0.365862 1.135769 1990 0.977724 1.880068 1.848497 0.363516 0.812245 1991 0.856729 1.745777 1.786893 0.361158 0.871573 1992 1.571126 1.786041 1.863025 0.358787 0.895423 1993 1.304059 1.765147 1.885531 0.356403 0.964731 1994 0.761176 1.774955 1.877371 0.354006 0.930949 1995 0.569374 1.745777 1.971461 0.351596 0.826075 1996 0.5302 1.83512 2.016114 0.349172 0.783189 1997 0.326336 1.825296 2.028449 0.222716 0.813581 1998 1.287802 1.745777 2.026656 0.522444 0.843855 1999 1.40824 1.786041 1.97635 0.164353 0.9154 2000 1.354108 1.765147 1.915769 0.457882 0.960471 copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 23 2001 1.294466 1.774955 1.911584 0.614897 1.03583 2002 1.330414 1.767823 1.914343 0.5302 0.984077 2003 1.311754 1.836007 1.92557 0.401401 0.974972 2004 1.334454 1.848189 1.956313 0.374748 0.932981 2005 1.334454 1.815777 1.971137 0.392697 0.940018 2006 0.968483 1.832253 1.95564 0.403121 0.942008 2007 0.977724 1.790567 1.978911 0.567026 1.082785 2008 0.856729 1.761101 2.009366 0.521138 1.227115 2009 1.571126 1.910464 2.016657 0.581153 1.287802 2010 1.304059 1.85685 1.977449 0.528917 1.243534 2011 0.761176 1.842983 1.887617 -1.04576 1.228144 2012 0.569374 1.791059 1.821382 0.511883 1.240799 2013 0.5302 1.807535 1.809358 0.361728 1.254064 2014 0.471292 1.795254 1.857332 0.367356 1.253096 2015 0.686636 1.834201 1.899711 0.230449 1.247728 2016 1.107888 1.836546 1.928908 0.260071 1.237292 2017 1.170555 1.838879 1.886247 0.336932 1.248219 copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). asian finance & banking review; vol. 2, no. 1; 2018 issn 2576-1161 e-issn 2576-1188 published by centre for research on islamic banking & finance and business 37 small and medium scale enterprises, employment and income generation in nigeria: a focus on professional sports viewing and betting centers emmanuel o. okon 1 department of economics, kogi state university, anyigba, kogi state, nigeria correspondence: emmanuel o. okon, department of economics, kogi state university, anyigba, kogi state, nigeria, e-mail: tonydom57@yahoo.com. tel: +2348023275716 received: january 21, 2018 accepted: january 24, 2018 online published: january 30, 2018 abstract given nigeria‘s high unemployment and poverty figures and the expected roles from smes, the nigerian government had in the past devised policies and incentives for the development of small and medium scale enterprises. in spite of all these efforts by the government, both at federal, state, and local government levels, to ensure the growth of smes in nigeria, some key factors have been claimed to be responsible for their perceived failure in nigeria. however, this paper focuses on new smes that have emerged in the form of professional sports and betting centers which are creating jobs and generated income in nigeria and africa in general. the sport and betting center businesses like any sme require serious attention so that their developmental role and sustainability will provide the much needed sustainable development of nigeria with regard to job and wealth creation. this paper examines the challenges and way forward for sport viewing and betting centre businesses in nigeria. keywords: sports viewing center, sports betting center, smes, nigeria, employment, income generation. 1. introduction small and medium scale enterprises (smes) contribute to improved living standards, bring about substantial local capital formation and achieve high level of productivity and capability. they have also been identified as a vehicle for employment generation and providing opportunities for entrepreneurial sourcing, training, development and empowerment. nonetheless, africa over the past decade has become the world‘s most exciting economic frontier and offering hope to a new generation of accomplished and engaged youth. by 2035 the number of africans joining the working age population will exceed that of the rest of the world combined, according to the international monetary fund (imf). but josé filomeno of the world economic forum identified the boom in small and mediumsized enterprises (smes) as the success story of the continent. today, these small and growing businesses create around 80 per cent of the region‘s employment, establishing a new middle class and fuelling demand for new goods and services, filomeno pointed out (thisday, 2016). in view of the expected roles from smes, the nigerian government had in the past devised policies and incentives for the development of small and medium scale enterprises. in spite of all these efforts by the government, both at federal, state, and local government levels, to ensure the growth of smes in nigeria, people such as abereijo et al have identified key factors which they claimed were responsible for their perceived failure of smes in nigeria(eze and okpala, 2015). however, this paper focuses on new smes that have emerged in the form of professional sports and betting centers which are creating jobs and generated income in nigeria and africa in general. this is because as propeller of economic growth, the sport and betting center businesses like any sme require serious attention so that their developmental role and sustainability will provide the much needed sustainable development of nigeria with regard to job and wealth creation. as opined by the chief executive officer, skye bank, mr. timothy oguntayo, with over 32 million nigerians involved in the smes sector, if properly developed, smes have the capacity to solve the unemployment problem in the country (thisday, 2016). www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 38 2. unemployment and poverty situation in nigeria: overview unemployment and total employment are the broadest indicators of economic activity as reflected by the labour market. the high rate of unemployment results from a relatively slow growth of labour demand which is combined with a rapidly growing labour supply in erring economy, especially due to enhanced population growth and high level of rural-urban migration. table 1 shows the national unemployment rate. the table reveals that the national level of unemployment was on the downward trend since 1999 as it dropped from 19.9% to 18.1% in 2000; and by 2002 it fell to 12.2%. it rose slightly to 14.8% in 2003 and dropped to 11.8% in 2004 and had almost remained constant till 2005. it showed a low record of 5.3% in december 2006. however, it increased in 2010 to 21.10%, 23.90% in 2011, and 24.30% in 2012. nigeria unemployment rate averaged 14.6% experienced astronomical increase from 2010-2012. in a report by the national bureau of statistics (nbs), the country‘s unemployment rate rose from 14.2% in 2016 to 18.8% in 2017 (vanguard, 2017). table 1: unemployment rate (1999 –2012) [%] description 1999 2000 2001 2002 2003 2004 2005 2006 2010 2011 2012 national (composite) -urban -rural 19.9 n/a n/a 18.1 14.2 19.8 13.7 10.3 15.1 12.2 9.5 13.3 14.8 17.1 13.8 11.8 11.0 12.1 11.9 n/a n/a 5.30 n/a n/a 21.10 n/a n/a 23.90 n/a n/a 24.30 n/a n/a source: nwagwu (2014) n/a = not available. poverty in nigeria remains significant despite high economic growth it sustained during the colonial era. nigeria has one of the world‘s highest economic growth rates [averaging 7.4% over the last decade], a welldeveloped economy, and plenty of natural resources like oil, which has turned out to be the main stay of the economy (nwagwu, 2014). in spite of the wonderful credential, the country retains a high level of poverty, with 63% of its population living below us$1 per day, which implies a decline in equity (nwagwu, 2014). the persistent of poverty in nigeria is due to income inequality, long term ethno-religious conflicts, civil unrest, and political instability. for instance, income inequality worsened from 0.43% to 0.49% between 2004 and 2009 (nwagwu, 2014). this is correlated with differential access to infrastructure and amenities. specifically, there are more rural poor than urban poor. this is as a result of the composition of nigeria‘s economy, especially the energy (oil) and agriculture sectors. oil exports contribute significantly to government revenues and about 15% of gdp, despite the fact that only a tiny fraction of the population is gainfully employed (nwagwu, 2014). table 2 ex-rays the employment generation capacity of the sectors. it shows that agricultural sector is the most employment generating sector (49.1%), followed by services (38.6%), whilst extractive sector is the least employment generating driver of growth. manufacturing, though with little contribution to gdp has higher employment generation capacity than extractive sector. table 2: total employment by economic activity, 2005-2014 source: ajakaiye (2015). nbs 2014 labour force survey shows that agriculture and services continued to provide main jobs for majority of employed nigerians. however the sectors also provide paid jobs for very small percentage of employed nigerians. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 39 the relatively low percentage of paid employment in manufacturing suggests preponderance of casualization of workers. this explains the paradox of growth and rising poverty in nigeria. according to the international monetary fund (imf), the 0.8 percent growth rate experienced in the economy in 2017 is not enough to reduce unemployment and poverty in nigeria (muhammad, 2017). 3. the role of small and medium scale enterprises in poverty and unemployment reduction small and medium scale enterprises are considered globally to be the engine of growth of modern economies and serve to provide more employment to a large portion of the population in a given economy than the big organizations and hence contribute in reducing poverty. however, the early 1970s witnessed an increased interest in small enterprises as a means of promoting employment in both developed and developing countries (mcrobbie, 1998). this interest was manifested by the establishment of sme institutions in a bid to accelerate economic growth and reduce poverty. it is worth noting that in the history of development, the advantages of smes have been notably controversial. for example, advocates of smes suggested that such enterprises play a very important role in the economy of developing countries by enhancing competition and entrepreneurship (beck et al., 2004; world bank, 2004). the competition, they argue, should lead to innovation and the subsequent development of skills and sme success. beck et al. (2005) further suggested that smes are more productive and create more jobs than large enterprises. this view is shared by a number of writers (e.g., kayanula and quartey, 2000; olawale and garwe, 2010) who indicated that smes employ not less than 22 per cent of the adult population in developing countries. it is believed that this figure is a conservative estimate. for example, ntsika enterprise promotion agency (2002) reported that in south africa, micro enterprises and smes contribute 56 per cent of private sector employment and 36 per cent of the gross domestic product. also, a few decades ago, chuta and liedholm (1985) reported that in sierra leone, smes employed up to 95 per cent of the country‘s labour force. in fact, oecd (2006) provided an even stronger argument for the role of the informal sector in economic growth and the eradication of poverty. similarly, in developed countries such as the uk where there are more large-scale enterprises, it was reported that smes account for 99.8 per cent of all the uk‘s businesses and provide 56 per cent of non-government jobs. indeed, carlsson (1996) and biggs (2003) argued that smes can add dynamism and flexibility to business activities, which will in turn result in improved economic performance. the flexibility of small business structures provides ease-ofentry for persons interested in the sme sector (amin, 2004) and also benefits those working from home, especially women in highly traditional settings (floyd and mcmanus, 2005). considerable evidence has been presented over the years to show that small businesses are important in economic stabilization, and that a decline in this sector will have a negative impact on economic growth (bannock, 1981; olawale and garwe, 2010). luetkenhorst (2004) advanced the view that smes are more labour intensive than their larger counterparts in support of the important role of smes in the economy. it was also argued that smes provide employment and help reduce income inequality. in fact, gebremariam et al. (2004) examined the impact of smes in economic growth and poverty alleviation in the usa. generally the study found that there is a strong relationship between smes, economic growth and poverty reduction. the study further shows that an increase in the percentage share of smes‘ employment had a positive impact on economic growth, thereby reducing poverty. furthermore, in agriculture-based economies, smes provide livelihood opportunities and nurture entrepreneurship. other advocates of smes, such as todaro and smith (2003), are of the opinion that smes operating in the informal sector can generate surplus income under hostile economic policies such as the denial of access to credit facilities, foreign exchange and tax reduction. pertaining to smes‘ potential to reduce poverty, gebremariam et al. (2004) suggested that small businesses contribute to poverty reduction through job creation and economic growth. robins et al. (2000), also proponents of smes, stated that these enterprises have the ability to enrich workers‘ talents and capabilities. the sector not only provides jobs, but also creates ―the prideful sense of being independent‖ (pradhan, 1989). these benefits are directly relevant to any effort to eradicate poverty in developing countries, especially in africa. experts on african smes have also pointed out that smes are a significant component of the solution to africa‘s development issues (maas and herrington, 2006). they maintain that the creation of new, sustainable smes is vital to the economic prosperity of africa, and without them the continent risks economic stagnation (olawale and garwe, 2010). 3.1. smes in nigeria: composition and employment creation the majority of business enterprises in nigeria like most other countries consist of small and medium businesses. small business constitutes a vital element in the business life of any country such as nigeria. nigeria small business enterprises are still predominantly in the traditional state with only a few in the better-organised stage. the national council on industry brought out four broad definitions of small and medium enterprises (owa afolabi, 2008); (a) micro/cottage enterprises, (b) small scale industry/enterprises and (c) medium scale industry/enterprises and (d) large scale /companies. the first term refers to an industry/enterprise with a labour size of not more than 10 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 40 workers or total cost of not more than n1.5 million, including working capital but excluding the cost of land. second, this is an industry or enterprise with workers‘ strength of between 11 and 100 or a total cost of not more than n50 million, including the cost of land. third, a medium scale industry refers to an industry with a labour size of between 101-300 workers or a total cost of over n50 million, but not more than n200 millioin including working capital, but excluding the cost of land. the forth term refers to an industry or enterprise with a labour size of over 300 workers or a total cost of over n200 million. in nigeria, the nbs/smedan 2013 survey showed that the total number of smes available was 37,067,416 (kale, 2015). the composition of msmes based on business type revealed that education had the greatest number of small and medium enterprises, followed by manufacturing. nonetheless, trade had the greatest number of micro enterprises, followed by manufacturing (see figure 1 and 2). figure 1: composition of micro enterprises figure 2: composition of small and medium enterprises source: kale (2015) source: kale (2015) in terms of employment, the survey showed that the total number employed was 59,741,211. this number represents 84.02% of the total labour force in the country (see table 3 for the distribution of employment generated in nigeria according to activities in 2009). table 3: distribution of employment generated in nigeria according to activities in 2008 4. emergence of sports viewing and betting centers smes in nigeria: unlikely sources of revenue and job creation 4.1. sports viewing centre business the world‘s leading digital sports brand has reported record traffic in nigeria for april 2016 – a second consecutive month, owing to the football addiction amongst the country‘s populace. to put in perspective, nigerians‘ love for the beautiful game of football prompted 5.7 million unique visitors to access espn‘s digital properties in april, logging 16 million visits and spending over 133.7 million minutes, thus exceeding previous records of 4.9 million unique users, 14.6 million visits and 110 million minutes – all of which were new records set in march (bankole, 2016). this growth is being driven by increasing interest and engagement with espn‘s coverage of global football, especially english premier league (up 30% month-over-month). www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 41 several nigerians have become self-acclaimed fans of some of the biggest clubs in the world like real madrid, manchester united, arsenal, chelsea, barcelona, manchester city, bayern munich, etc., without ever visiting the homes of these prestigious club sides. the advent of digital satellite television (dstv) has led to the establishment of viewing centers, where foreign football enthusiasts and fans can converge to watch foreign league matches. this is a fact because some nigerian have not even been able to afford their own cable television, their only source of access to seeing their favorite teams play is viewing centers. today, these viewing centers are now at every nooks and crannies of major cities and towns in the country (ezea, 2017). this phenomenon has continued to grow in leaps and bounds as the fan continue to patronize them. little wonder on match days most viewing centers are full with no sitting space a few minutes after a match has started. most people to such centers to meet up with friends and fellow club supporters, they often say that the viewing center is the best place to watch a match (business plan, 2017). given the statistics, it is evident that starting up a viewing center business will churn out a lot of profit. in most areas of the country, the amount to watch a single match is about n100, if a viewing center can seat one hundred people, the owner will be making about n10, 000 every match. usually, at weekends, multiple matches are shown, as many as three to four matches per day, if the owner make n10,000 per match, he will be making about n30,000 to n40,000 in one day(business plan, 2017). sometimes, especially when the uefa champion‘s league is ongoing, matches are also shown during the week, spelling more income for the center owner. at the end of the month, after deducting money spent for maintenance and cable television bills, the owner will still rake in more than n100,000 depending on the location of the business. isn‘t that a good small scale business? this viewing center can be set up as small or medium scale enterprise and food and drinks can be added to it. according to mr. linus eze, a businessman who operates a football viewing center business ―for nigeria‘s game, i made over n120,000 from tickets, food and drinks because people came with their friends, relatives and even children to watch the super eagles‖(my top business ideas, n.d.). a well established football viewing center business can generate a monthly profit of at least n400,000 (approx. $3,0 00) (my top business ideas, n.d.). however, there are a few key components required to start up this business: a) wooden benches or plastics chairs; b) carpet; c) standing fans, ceiling fans or air conditioner to make customer comfortable; d) air freshener; e) generator, ups and other power supply; f) cable tv or dstv dish with monthly subscription; g) two big television set with high resolution or projectors; i) extension sockets for customer to enjoy the freedom of charging their phones; j) a refrigerator just in case of adding an extra income stream by selling cold soft drinks (nigerian infopedia, n.d.).; k) a printed ticket or coupon to identify paying customers; the person dabbling into the business is expected to have interest in sports. no need of going for any training before setting up the business. the person starting the job may require the services of a sales person, who will be collecting money and issuing out tickets. according to babatope (2017) the start up cost is n200,000, n500,000 to n700,000 depending on the scale of the football viewing center business to be operated. the estimated earning is n70,000 above monthly, especially during football season. figure 5: a football viewing center in nigeria source: nigerian finder (n.d.). 4.2. sports betting centre business english premier league enjoys a religious following in nigeria, likewise the spanish la liga. but for some fans, watching the game is not enough — they must also put money on it. this has given rise to a burgeoning betting sector in the west african country. from just one betting company 10 years ago the betting sector in nigeria has www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 42 grown to over 20, according to one online list (adepoju, 2017). banned elsewhere, betting, a form of gambling is legal in nigeria although it is strictly regulated and players have to be over 18 to participate. according to a recent investigation, roughly 60 million nigerians between the ages of 18 and 40 are involved in active sports betting. on average, these punters spend around 3,000 naira (about $15) every day on bets. in south africa, government statistics show more than half of the adult population is involved in gambling activities, predominantly sports betting, on a regular basis. this trend is roughly the same across west, central, east and southern africa. in the 2014 gambling outlook report released by pricewaterhousecoopers, the combined size of the betting market in kenya, nigeria and south africa is projected to be worth nearly $37 billion by 2018 (iwuoha, 2016). nigeria with a population of over 200 million people with a huge unemployment rate plus massive recession has opened a way for people to look for ways to make money (hot vibes media, 2017). sports betting generates millions of naira every day, and has become a very hugh business in nigeria. supporters of sports betting in africa claim it‘s a business that offers employment to thousands of young people, provides quick money for ordinary people, generates tax revenue for government and contributes to economic growth in african countries (iwuoha, 2016). according to ajegbile (2016), the sports betting industry has been one of the biggest employers of labor all over the nation and as such the industry has really been impactful on the society. however it is safe to say that the industry has employed over 10,000 people, with thousands having made millions on nigerian sports betting platforms (ajegbile, 2016). adepoju (2017) observed that the big names in the sports betting industry make an average of 1.5billion naira (over $4.7-million) per month and about $2-million in profit every month — which is more than what many nigerian startups are dreaming to generate in a year. betting agent/shop/cafe is the interface between the sports and a punter. there are basically two types of sports betting agents: shop agents and online agents. shop agents are those that open shops to take bets from the public and the online agents are those that help the platform‘s customers fund their accounts. somebody has to be a shop agent before becoming an online agent. there are many betting platforms in nigeria: bet365naija.com, 360bet.com, nairabet.com, betcolony.com, lovinbet.com, etc. the requirements for being an agent with any of the betting platforms are similar. according to castles (2015), the most important requirement to run a sport betting cafe is a sizeable shop space in a residential area with a predominant population of youths. other requirements are: a computer (desktop or laptop with at-least 1 gig ram or above and 2.0 processing speed or above), a printer that will be used to print match fixtures and odds for the customers to view as well as a thermal printer that will be used to print receipts just as you have in big retail stores and supermarkets. apart from furniture, also needed is a fast internet browser and a generator with a minimum capacity of 2.5kva for effective access to the betting website and provide constant power supply to the café during the periods of business. after the shop space and equipments have been gotten, a licensing fee is paid to the sports betting platform that will come around to install their software on the computer, create and account for the café and train the owner and staff on how to properly run the business. according to mrpepe.com ( n.d.), the start up cost is estimated at ₦956,000.this is a worst-case scenario budget. in terms of remuneration, the owner of the café is entitled to 50% of profit (profit means total stakes minus total wins); however in a situation where the total wins are more than total stakes, the betting platform will send money to the agent to pay off the debt (castles, 2015). sport betting shop in nigeria source: gltrends (n.d.). according to information hood (n.d.) and my top business ideas (n.d.), to be a sport betting operator or to have a sport betting company in nigeria, the requirements are: http://www.bet365naija.com/ http://www.360bet.com/ http://www.nairabet.com/ http://www.betcolony.com/ http://www.lovinbet.com/ www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 43  operation office: the first thing a sports betting company needs is an office where it can operate from, it should be a very comfortable place  business registration: to be permitted to start a sport betting company in nigeria, an operator is required to visit the national lottery commissions of nigeria to apply and obtain a license. the national lottery commissions is the body regulating the industry in nigeria.  betting website: an operator must endeavour to have an official website for its company where people can easily visit and know exactly how the sports betting company operates.  hiring programmers: there is need to hire one or two programmers to always work on the company‘s betting website security.  advertisement: there is need to have some advertisement done both online and offline. advertising on tv channels is considered the best advert to get to the right audience.  business bank account: an operator is expected to open a business account with any nigerian bank or banks. in the same vein, a secured and enabling platform should be created where people can make use of their credit cards to place their bets. that is, a secured payment platform is essential.  franchise or open multiples of outlets in different locations: the numbers of outlets a sports betting company has determines how successful a company can become. even though it is expensive opening outlets in different part of town, it is very important to do so because majority of those who engage in sports betting in nigeria prefer to physically visit betting offices to place their bets as against doing it online. as noted by information hood (n.d.), starting a sport betting company require some good amount of start up capital, at least having up to n10,000,000 in other to keep pushing even when loses are experienced (makinde, 2014). however, according to afeez adigun, an agent for 1960 bet company, lagos, a betting company can generate up to n20 million monthly and use between n5 million and n7 million to meet winners obligations in terms of payment (makinde, 2014). similarly, lanre gbajabiamila, chief executive officer, lagos state lottery board, said the lottery industry was very risky but also lucrative. gbajabiamila said that the board generated about n1 million in 2013 from about 11 sport betting companies in the state (makinde, 2014). the board urges the federal government to create a more enabling environment for operators in the industry to increase revenue and create jobs for youths. 5. hindrances to the development of viable viewing and betting centre businesses in nigeria 5.1. viewing center the business prospects in football viewing center in nigeria is high, however, there are some challenges:  the greatest challenge of setting up a football viewing center is space. those who have the opportunity of space have an edge over others. very often the room or building is not properly ventilated so as to make viewers feel comfortable. the recent ugly incident at a viewing centre in calabar, cross river state where no fewer than 30 manchester united club fans died of electrocution while watching europa football league match between manchester united and anderlecht has once again raised the questions(ezea, 2017); why do people prefer watching football matches at viewing centres than their homes? how safe and healthy are the viewing centres?  most often, the viewing center is a one-man business(sole proprietorship) and lack training and capacity building. no prior apprenticeship through which they acquire managerial skills.most people go into the businesses without adequate knowledge or entrepreneurial skills on how to run businesses. many of the staff employed in some viewing centers are not well trained in managing viewers in given situation. issues and attitude of some viewers could be rowdy and they must learn to tolerate different attitude of persons because with their excitement and fanaticism they can talk carelessly or rudely at another viewer and it is expected that the staff of the viewing center should be able to ensure it does not get out of control (ezea, 2017).unfortunately, some of the staffdonot often treat customers with respect.  the poor state of infrastructure in the country, especially electricity has been a major obstacle to the growth of smes like sports viewing center. the epileptic or irregular power supply has contributed significantly to the high cost of doing businesses in the country. only few entrepreneurs can survive without power. that means, they must have a standby generator and running the generator could be costly given the fluctuating price of fuel in the country.  most smes find it difficult to access funds or capital. most nigerian banks don‘t support start-ups and even existing businesses don‘t have the required collateral. for smes that go to non-conventional banks, the high interest rate is always a burden. the issue of funding or finance, therefore, is a major challenge for smes in nigeria including sports viewing center businesses. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 44  crowd violence is a problem associated with football, and other team sports. however, in recent weeks, people have clamored for the closure of some viewing centers because it has been alleged that they attract people who are prone to violent conduct. there was the case of the arsenal fan who was stabbed about two years ago while watching a live match in one of these viewing centers (aeiromoon, 2009). viewing centers are also seen to be synonymous with drinking, smoking and even gambling. it was reported also that five people were shot by policemen in igando(a suburb of lagos) after watching a wigan vs manchester united match.the police alleged that there was reported fighting among the viewers after the match and they received a distress call to come quell the violence (aeiromoon, 2009).  there are other challenges associated with viewing centres which has to do with cost implications, because if the operator does not have facilities like television, hall, seats and others, the cost of setting it up could be huge. similarly, there is the challenge of breaking even considering is given to the payment of dstv subscription monthly, electricity bill, fuel for generator, allowances for the staff and others. if the monthly turnover weighed side by side with the cost of running the place, an operator may end up satisfying customers in most months than breaking even. 5.2. betting center and betting company/operator challenges there are some teething problems currently faced by operators of betting centers in nigeria:  access to electricity and its accompanied high tariffs poses a greater challenge to betting company‘s growth and performance in nigeria just like other smes. the epileptic or irregular power supply has contributed significantly to the high cost of running their businesses operations in the country. accord to project championz.com.ng (2017), the effect of electricity power outage on smes in nigeria posited that, the current electricity crises in the country were costing the smes over us $686.4 million of annual sales. this electricity challenge makes smes continued to record a huge loss day by day as a result of poor electricity supply. these have been partly blamed on market and state failures, which have led to the poor electricity supply.  another major need of the sports betting operators is internet provision to boost the business. the growth of internet in nigeria is limited, compared to what is obtainable in developed countries. according to recent surveys conducted by one of nigeria‘s foremost technology research and content management companies e-shekels limited on effective engagement of the internet for development, has revealed that there were great demand for the internet facilities in nigeria, but due to numerous obstacles those demands could not be adequately met. for instance, with very unreliable power in the country, internet operators are left with no choice but to acquire and rely constantly on generators; expending huge gallons of fuel daily, in order to distribute internet to offices, homes, or cafes for subscribers (media blog, 2015).  while presenting nigerian startups with a brighter chance for profitability, the difficulties in entering, surviving and profiting in the betting company/operator market are discouraging many startups from even trying.  indigenous tech development companies have shielded away from creating home-grown solutions for this billion-naira betting industry. nigerian tech companies have the capacity to develop local technologies but it is just that local innovators are not looking in that direction. the betting giants spend millions of dollars on technology including those that could be locally sourced (adepoju, 2017). all of them are focusing on fintech, no one is exploiting the opportunities in lottery technology.  the recent foreign exchange crisis resulting in the weakening of the nigerian naira has placed a severe strain on businesses in nigeria. the software and hardware solutions for gaming, used by operators are mostly sourced from foreign providers and as such, operators tend to pay more than previously negotiated due to fluctuations in the currency (brandspurng, n.d.).  there are also the tough regulatory conditions and multiple bodies. in lagos state for instance, to operate legally any betting company would have to register with the lagos state lottery board and the national lottery board. a betting company can be sanctioned for many things including upgrading or changing software without information the regulator. in addition betting companies are required to remit 20% of their earnings to the regulator and should keep about 50% of earnings aside as prize (adepoju, 2017). in essence, if an individual plays a lottery for 100 naira, it will be split into several components. in sum, there is overlap in the regulatory function between the federal and state levels in nigeria. however, the national lottery regulatory commission (nlrc) also regulates lottery activities in nigeria leading to the operators being levied twice most times. this discourages entrance of new operators and future investments (nairametrics, 2017). www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 45  cyber criminals may compromise a platform by installing malicious software (malware) to gather information about players from within their account. this information could include cardholder data, login details, bank account details, betting history and other personal information (brandspurng, n.d.). also, a denial of service (dos) attack could be carried out which could disrupt the performance of the betting platform or even make it unavailable, leading to customer dissatisfaction, service downtime and loss of betting revenue.  a number of companies that make up the betting space evolved from the old pool culture, and these businesses were managed with limited financial knowledge depending on the clientele base (nairametrics, 2017). without good management structures or clearly defined strategies for the business, operators struggle to fulfill obligations, expand and attract foreign direct investment at the right price.  it is easy for sport betting in nigeria to be used as a means of money laundering especially under nigeria‘s unregulated regime due to the fact that all transactions in an online betting is unaccounted for (ekpeyong, 2017). the punters cannot be traced for verification. furthermore, a person may launder money through a sport betting operator because it is difficult for financial institutions and law enforcement agencies to determine whether the money transferred to the bank account of a sport betting operator is for payment of winnings on genuine bets or not. 5.3. suggestions to achieving a viable viewing and betting centre smes in nigeria concerning the viewing centres, effort should be made by government to encourage new tv provider (indigenous cable companies) with the hybrid broadcast broadband (hbb) technology that combines both satellite and internet service for tv services to enter the pay tv market and challenge the monopoly of digital satellite tv company like dstv so that subscription rate can be reduced. for most nigerians, multi-channel tv is a big dream. apart from nigerians living in lagos, abuja, and maybe port harcourt, most nigerians have access to less than five free terrestrial tv channels. this means that most nigerians rely on terrestrial, satellite, or cable direct-to-home dth tv for multi-channel tv (marketing edge, 2017). government must put the necessary infrastructure in place and ensure adequate implementation of the country‘s broadband policy in order to boost actual fixed and mobile broadband penetration in the country (this day, 2017). -effort should be made by owners of viewing centers and as well as government to beef up security around viewing centers to avert harassment and clashing of fans. managerial training should be provided by government organizations in order to assist owners of the sport viewing and betting centers the federal government should create a more enabling environment for operators of sport viewing centers in the industry to increase revenue and create jobs for youths by putting in place the necessary infrastructure like electricity to help cut back on the cost of doing business. standards should be enforced by the appropriate authority on the structure of viewing centers to avoid any collapse of facility or suffocation of viewers. the football viewing center building should be safe from any hazards, crime, high tension cable and other unforeseen incidences (ezea, 2017). indiscriminate building of football viewing centers should be disallowed. provision of soft loans at loans at low interest rate to viewing center smes would help improve the standard of equipment and facilities employed in setting up the business. it will help those who would want to upgrade from small scale to medium scale. regarding betting centre businesses, large bets should be placed through the bank accounts of punters and not in cash. this will allow financial institutions, the commission and law enforcement agencies to trace and investigate the source of suspicious huge bets for purpose of detecting fraud or money laundering. betting content providers should partner with local betting companies to participate in the growing success of the betting industry by providing technology services and support. such technology should be able to support all forms of bank cards, enabling the purchase of betting or lotto tickets through its secure terminals. in the same vein, betting companies should partner with mobile payment platforms, to offer attractive bonuses on stakes, thus attracting more customers. state government should come up with some far-reaching policies aimed at regulating the operations of betting service providers and also generating revenue. this can be done by instructing all operators to update their licenses and offset any outstanding tax liabilities. 6. conclusion given nigeria‘s high unemployment and poverty figures, the creation of jobs by the private sector is critical and in this regard, the impact of sport betting has been profound. with some big companies running nationwide operations, while other focus on maximizing their reach regionally, the industry has created thousands of jobs directly and indirectly. big companies have staff strength running into hundreds but through their associate networks, they offer www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 1; 2018 46 agents a source of livelihood through affiliate partnerships as they earn money through commissions (kazeem 2015). also, with the proliferation of viewing centres in nigeria, millions of fans of some of the big leagues, such as the english premier league, and the spanish la liga can view live matches, nonetheless, betting provides nigerians the 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(2003). economic development, 8 th edition, pearson. vanguard (2017). nigeria‘s unemployment rate rises from 14.2% to 18.8%. https://www.vanguardngr.com/2017/12/nigerias-unemployment-rate-rises-14-2-18-8/. world bank. (2004). review of small business activities. washington, dc: world bank. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) https://www.vanguardngr.com/2017/12/nigerias-unemployment-rate-rises-14-2-18-8/ copyright © cc-by-nc 2020, cribfb | asfbr asian finance & banking review; vol. 4, no. 1; 2020 issn 2576-1161 e-issn 2576-1188 published by centre for research on islamic banking & finance and business, usa 42 stock market development on economic growth of south asian and malaysian economies: a comparative analysis muhammad gias uddin phd student department of accounting & management universiti tunku abdul rahman (utar), malaysia e-mail: mdgias89@gmail.com mohin uddin phd student department of accounting & management universiti tunku abdul rahman (utar), malaysia e-mail: mohin1uddin2@yahoo.com sanjida sultana emu bba (finance & banking) international islamic university chittagong, bangladesh e-mail: sanjidasultana587@gmail.com abstract this analyzes concerning empirically appraise the effects and effect of stock market growth on the economic increase in two areas, in particular, south asia and malaysia. the researcher used market capitalization, total fee traded ratio, and turnover ratio as signs on inventory market improvement whilst gdp through a capital increase worth is back because of standardized monetary improvement. the linear dashboard facts methodology is utilized over the yearly facts about 1996-2018 according to locate out concerning the phenomenon. the effect is then compared at some stage in the countries concerning both regions. the experimental findings point out that inventory need enhancement contributes after half extent between the financial expand on the south asian region but its impact concerning malaysian neighborhood discovered in imitation which is very much significant. keywords: stock index, economic development, south asian market, malaysia. 1. introduction 1.1 introduce the problem the notion concerning economic development to flourish monetary development was as soon as delivered by access. a raised yet nicely developed monetary regulation may make a contribution in imitation of the economic increase concerning a country, and wellfunctioning economic rule may keep obtained by the capability of practical innovation yet environment pleasant provision regarding resource allocation. schumpeter attracts interest after the administration of matter the place monetary establishments are obligatory because of pecuniary growth due to the fact appropriate in imitation of these organizations worthwhile investment could be easier and more possible. he emphasized the banking procedure to be honored into increase then improvement on us regarding a. there are deep other researchers anybody difficult among the region concerning monetary development after expanding association, which includes. discus according to an imitation of adjasi & yartey (2007). the boom about an economic system enhances the economic location development. when a financial system develops, that promotes monetary improvement with the aid of course of responding to the greater claim concerning functions provided utilizing monetary institutions. with the growth of monetary activities, financial features require additional increases or among discipline following join the growing claim more economic institutions built, which consequences into standard monetary development. the welldeveloped monetary markets, through bettering headquarters accumulation, accomplish contributions in imitation of financial development. this reason has been supported by way of researchers together. the monetary firms execute grant a vast extent concerning applications into a system under enhancing growth. there are special methods as may keep aged in imitation of absorbing a seem to be at so much how financial enhancement enhances growth. these consist of sources allocation, hazard diversification, advertising, and marketing mailto:e-mail:%20mdgias89@gmail.com https://www.iiuc.ac.bd/ copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 43 about savings, yet specialization within industrial (adjasi & yartey, 2007). it is not frequent affairs so much monetary increase execute be rendered through monetary improvement only. the market of inventory allows the community after deflecting their monetary savings beyond tiny following increased dependable projects. capital property is being produced over these kinds of variations. because of the increase of demand, the lengthy conduct initiatives may keep commenced that shifts the industrialization and strikes closer according to development (barnor & wiafe, 2015). funding possibilities need to lie introduced through done nicely managed or equipped inventory market. this does stand complete when fairness markets take on responsibilities certain tasks so grant most profits and ultimately consequences into monetary growth. stock markets hold a massive function of the increase or improvement of economies into both promoted and creating countries. stock markets function greater than not many services as honor industrial foot then fit after this purpose are regarded namely important element over manufactured expansion, which within the cease contributes fairly according to the enlarge concerning a country (mia et al., 2014). 1.2 importance of the problem stock change is a buying and selling arrangement the area monetary means are traded then that deliver chances in conformity with shoppers into making lengthy epoch duration funding decisions. the morality markets, among that way, allocate the monetary assets efficaciously for some concerning a sort of economic purpose. the expected stock market allows investors via faithful assignment on their sources because of several economic reasons or afterward comeback decrease lower back with excessive profits. the equity markets help of merchandising sources effectually then effectively through transferring metropolis beside one unit in conformity with others, where capital is being required. the markets of stock moreover significantly whack cash following employer zone or thereby honor the boom about a budget. the stock wants enhancement kin with economic growth; it endured a debatable hassle into each theoretical or empirical literature. the officials on these nations are nevertheless indecisive related to characteristics regarding inventory markets and thereby brainchild insurance system for upgrading concerning markets. this learns as regards is a try in conformity with empirically find oversea respecting this matter throughout twins' areas concerning asia particularly south asia or malaysia. the consequences concerning learning about do remain useful for commercial enterprise nearby of every are among funding perspective. it can moreover facilitate traders into making good funding choices between the course concerning about stock markets of two regions (moayedi & aminfard, 2011). 2 literature review monetary development's sit together with financial increase about dialogue thinking about up to expectation last dense decades. its alliances within four dimensions. the forward is supply-leading speculation who postulates so much economic development factors economic growth; such is moreover recognized as like finance-led increase hypothesis. the organization over sources execute stay viable thru raised then well-functioning monetary law yet as much a quit result it leads within the route regarding financial growth. the 2d is demandsimilar hypothesis or additionally termed so with financial objectives. after this objective of economic up-gradation encourages the progress of monetary divisions i.e., then even is pecuniary rise afterward that outcomes in accelerated require because of monetary capabilities yet development concerning financial sectors. this is proposed together with the resource (al hallaq et al., 2019). the 1/3 is the remarks speculation or is the combination concerning advance joining faculties over thoughts while the 4th hypothesis proposes a bidirectional causal kinship i.e., preceding monetary enhancement enhances increase than in flip growth stimulates the economic enhancement. inventory market affectivity is persuaded together with the resource about within near cases pair factors especially legislative elements or organizational factors. this capacity up to expectation agreement establishments disclose reliable statistics afterward that will inspire traders or he accomplish a performance among stock markets’ practices confidently. the market of stocks or banks is fundamental elements regarding monetary quarter development or each performs contribute to enlarging on a financial regulation positively (levine & zervos, 1998). the merchants execute arrive unique or welltimed files as regards corporations besides inventory markets, due after who in that place are gambles about extending in returns concerning investors. they moreover argued so within an economy, boom performs stand exploited between lengthy conduct by way of decreasing means about thin belongings yet whole these may remain executed via stock markets. similarly, they have stated as the need because of high priced yet precise statistics is reduced between environment-friendly inventory markets so whole vital statistics are mirrored by way of the use of inventory fees of certain markets. the large characteristic of thin inventory markets between boom concerning a pecuniary provision has been highlighted. the firms may stand in a position to secure wished capital more unexpectedly within softened stock markets or that moreover helps in useful resource division or investments. however, levine & zervos (1998) criticized that extraordinarily melted markets disheartened the amplify of 3methods. the 1st one is to that amount increased predictable profits of investments perform result among customers to make investments greater than that reduces the pecuniary financial savings rates. secondly, the lesser doubtfulness related to funding may additionally reason a reduction within salvation costs and thirdly investor myopia is triggered appropriate after melted stock markets yet that situation is detrimental because of decreasing corporate governance and financial growth. copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 44 levine & zervos (1998) argued that inventory marketplaces defend investors towards a person's chance through a capacity of presenting to them portfolio investments. the investment plan has been diverted to limit restless initiatives appropriate according to gamble diversification. specialization then affectivity over the monetary rule is classy through stock markets due following as chance is special to that amount leading economic growth. in merchandising about enlarge throughout flourished as much precise as, like flourishing countries, stock market's position is large then is additionally confirmed via a range over researchers' kind of. the international locations up to expectation hold properly developed pecuniary systems, specifically environment pleasant banking system, are able after embellishing increase in the united states concerning the united states of america (naik & padhi, 2015). manufacturing economies monetary place improvement is increased surroundings friendly as much in distinction to the agronomy. world bank (2000) mentioned that amount of financial markets about the world is becoming a feature over collectively as much ordinary marketplace. the buyers are shifting of the course of promoted nations according to acquire greater earnings than even are additionally probabilities about diversification regarding a quantity threat. the liberalization over monetary marketplaces makes it been probable after doing investment rather a country. the global merchants can make investments in fairness markets above global areas then are successful after diversifying their portfolios. there are distinct techniques that have been ancient together with the useful resource over researchers in imitation of look at the kindred on financial quarter improvement in imitation of pecuniary boom throughout wonderful countries. levine & zervos (1998) conducted his lesson about seventy-seven countries then back the age period out of 1960-1989 then utilized exclusive measures after test its relationship. his findings expose a tremendous kindred of monetary area improvement then growth. similarly, levine & zervos (1998) examined forty-eight nations inside the era's impact on 1973-1993 yet concluded so stock demand liquid solvency encourages development. bist (2017), however, executed a weak proof regarding this affinity between 19 oecd countries. in partial other studies, luintel et al. (2008) examined the alliance between monetary quadrant development or growth. he ancient the facts of 14 worldwide locations because of its reason yet engaged collection dashboard model then pronounced a magnificent effect between championship of countries. adjasi & yartey (2007) additionally strong this impact within african international locations or found a super relationship. the presence concerning causality into monetary area development yet boom has additionally been rendered together with the resource. on the unique facet, no such kindred over these two variables have been found in bangladesh by using mamun et al. (2018). for attaining monetary progress, the close fundamental aspect is after improving the market of stock concerning that amount country. similarly, al hallaq et al. (2019) referred after that in that place are an extent over fundamental capabilities conveyed out with the aid of capacity concerning stock markets into kilter following embellishing pecuniary growth, as encompass reduction regarding transaction then monitoring costs. bayar et al. (2014) additionally examined these kindred within turkey at some stage from 2000-2014. he aged johansen and juselius co-integration drink a look at yet documented to that amount improvement concerning inventory markets affects the development of the monetary policy of lengthy run. naik & padhi (2015) located to that amount of monetary location improvement performance are excessive multiplication nearer in imitation of increase for a panel about 27 flourishing markets. as pecuniary make bigger regarding asian nations is developing gradually, it is an occurrence the interest regarding many economists then officers out of closing little decades. many distant places consumers are taking hobby among asian markets particularly taiwan which is significantly important, china which is the largest economic nation, hong kong and indonesia and korea, etc. the reason is over the cause as nations out of these areas bear big increase potentialities or variation opportunities. while an enormous composition is available related to imitation of the financial quarter improvement and boom a comparative finds out respecting concerning global locations beyond south then malaysian areas are missing behind. the current lookup work is an effort to enter the hole into present writing and is meant after comparatively test the have an effect on stock demand improvement on an increase in economies chosen from regions. 3. research methodology panel records procedure is utilized throughout this lesson after analyzing the result on alternate improvement concerning boom about pattern countries. the pattern is elected from two asian areas especially south asia then malaysia. the perfect iv international locations beyond each region are picked namely a sample. these nations keep a sizeable section about gdp then it's predicted to that amount prime sample is effective to keep a real representative on the total people. the sample economies embody asian nation, pakistan, bangladesh, or sri lanka from south asiatic vicinity since china, japan, korea, and outset beside the malaysia region. the next dashboard regression model is applied because of empirical analysis: gdp per capita quantity about the increase is employed namely a changeable extent then namely a proxy of the economic process. market capitalization (mc), volume price listed quantitative bracing (tvt), or turn quantitative rapport (tor) are aged as freelance variables and as a proxy on change growth. distinct variables so much may also have an effect of financial manner are copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 45 enclosed so management variables. these embody foreign direct funding (fdi), home bad consumption (hhce), and degree concerning inflation (ir). in conformity with research the result, records of 1996-2018 are used. the information about dependent, freelance, yet choice financial learning variables is extracted beside a reliable web page of ibrd. 4. results the outline statistics over variables or concerning information has been examined. the effects over outline records are partial within table one below: table 1. descriptive statistics gdp mcr tvt str fgi hhce ir mean 3.808 3.772 3.165 4.283 0.367 4.215 4.621 median 3.758 3.848 3.567 4.232 0.212 4.214 4.151 maximum 14.500 8.245 7.768 7.283 5.177 5.523 23.675 minimum -5.555 0.485 -6.173 0.451 -4.312 2.673 -3.112 std.dev. 3.172 1.367 2.226 1.151 1.4336 0.1241 4.515 observations 150 150 150 150 150 150 150 the desire concerning applicable model in dashboard facts is made concerning the thought over chance quantitative affinity then hausman tests. the dense absorb an appear at values suggests up to expectation mounted result model is proper because of that information. the panel regression along the hooked-up result model is utilized for empiric testing. then resolve regression models additionally are utilized because of international locations throughout south asian then malaysian region. the outcomes on dashboard regression are brief of desk twins below: table 2. influence regarding stock market development concerning economic growth variable total south asian region malaysian region c 32.81355** (14.43233) 48.58238** (22.85231) 54.65735*** (14.51365) mcr 0.632214* (0.372244) 1.212772*** (0.475451) 0.735738 (1.411891) tvt 0.44321 (0.256111) 0.147889 (0.031287) -0.515666 (1.081544) str 0.441184 (0.233121) 0.527864* (0.254113) 1.124515 (1.125437) fdi 0.448765 (0.278661) 0.484151 (0.232225) 0.668882** (0.177623) hhce -7.257311** (0.157111) -11.21511** (6.281267) -13.66386*** (2.617175) ir -0.141432 (0.153111) -0.123677 (0.047618) -0.182633 (0.158845) adjusted r-squared 0.49 0.46 0.48 durbinwatson stat 1.84 1.87 1.89 (*****indicates significance at 10%, 5%, and 1% level respectively while values in parenthesis show standard errors) the outcomes point out so much alternate development doesn't almightily impact the financial method regarding pattern economies. the sickly essential result concerning only 1 indicator of change improvement is renowned. the result of choice needs growth point erspersistedun importantly. the comparative evaluation on two areas indicates that the amount result concerning change development is comparatively a tussock on pronounced inside the monetary technique over the south asiatic region. 5. conclusion this education examined the effect concerning change development on the economic manner in two asian regions mainly south asia yet malaysia. gdp per capita dimension about development is engaged namely unstable quantity, as alternate development warning signs are old as regresses. researchers tend in conformity with conjoint administration some financial lore variables copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 46 especially overseas direct investment, home ruin charge or degree concerning inflation as may additionally without delay and indirectly bear an effect about the monetary process. for empirical analysis, the yearly statistics of 1996-2018 is used. the panel records regression methodology is engaged then because of selecting relevant mannequin probability receive a seem at yet hausman exams are applied. the consequences show so trade improvement isn't powerfully causative following monetary manner regarding pattern countries. the comparative analysis, however, shows a comparatively stated result in the south asiatic region. the result is stated according to lie dime of nations about the malaysia region. this may result following the explanation to that amount among japan yet korea, the financial clustering provision is common anyplace the investors' team originates theirs very own bank together because of his or her cash transactions or choice activities. the learning is extended within the future by using as like properly namely a cluster of countries, regions, yet symptoms for careful and decisive evidence. references adjasi, c. k., & yartey, c. a. 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(2000). reforming public institutions and strengthening governance: a world bank strategy. world bank. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). https://econpapers.repec.org/repec:eee:deveco:v:86:y:2008:i:1:p:181-200 copyright © cc-by-nc 2020, cribfb | asfbr asian finance & banking review; vol. 4, no. 2; 2020 issn 2576-1161 e-issn 2576-1188 published by cribfb, usa 1 the effects of inventory management capability on performance of the firm business strategies as a mediating role md. sazzadur rahman khan phd assistant professor department of business administration stamford university bangladesh, bangladesh e-mail: tipu06bd@yahoo.com received: april 29, 2020 accepted: may 30, 2020 online published: july 02, 2020 doi: 10.46281/asfbr.v4i2.649 url: https://doi.org/10.46281/asfbr.v4i2.649 abstract the research aim is to evaluate the mediating aspects of business strategies e.g. differentiation and cost leadership strategy in affecting the aspects of inventory capability e.g. cost-related factors of inventory and techniques of inventory and firm performance e.g. return on asset (roa) and improve productivity (imp) of the bangladeshi garment industry. a survey was utilized to collect information and the questionnaire was dispersed among 385 senior managers in the readymade garment industry of bangladesh. for the data analysis, amos version 24 and spss version 23 were used. the findings of the analyzed data revealed that strategies of the business mediate the consequence of inventory materials capability and performance of the firm. the (sem) results identify that the study model has an appropriate observation fits. keywords: inventory capability, business strategy, firm performance. 1. introduction the economy of bangladesh is heavily dependent on the readymade garment industry which is the foundation for creating job opportunities in the country. in a developing country like bangladesh, the garment industry is the major driver for industrialization. the readymade garment industry is the basis of foreign earnings and accounted for 81% of total export income in bangladesh (bgmea, 2016). bangladesh export garment products about $28 billion, on the other hand, china who secured the first position in export equivalent to $130 billion of readymade garment product (bgmea, 2016). the present issue is how china secured this achievement – the answer might be a business strategy with proper inventory management practices. knitwear sector contribution increases in which the local suppliers provide about 80% of raw materials and the manufacturers whereas only 15% of raw materials are supplied by the local suppliers in the case of the woven sector. in the woven sector remaining 85% raw materials required to import from other nations (nuruzzaman, 2013). in bangladesh, there is insufficient raw material production which influences buying fabrics from different countries. it encourages the deficiency of vertical integration. at the end of the day, it creates high lead time to complete the order (alam & natsuda, 2016). there is deficiency also in the greater position of infrastructure that creates in the delay of shipment (saxena & salze-lozac'h, 2010). this research applies the resource-based view (rbv) theory developed by barney (1991) to evaluate business strategies as a mediating role in the consequence of inventory materials capability and firm performance of the readymade garment industry. 2. literature review inventory can be defined as a stock that required producing a product e.g. items in work in process and raw materials and supportive activities' e.g. repair, operating, and maintenance dey and sumon (2011). according to bozarth, handfield, and chandiran (2008) there are two categories of safety stock and the cycle of inventory stock. the stock of safety refers to the additional stock to meet up some uncertain demands and stock of cycle is the company's regular used stock dey and sumon (2011). according to farahani and rezapour (2011), stocks are reserved for various reasonsto reduce uncertainties, further mailto:tipu06bd@yahoo.com https://doi.org/10.46281/asfbr.v4i2.649 https://doi.org/10.46281/asfbr.v4i2.649 copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 2 sale to others, co-ordinate manufacturing process, and to achieve economies in respect of objectives. inventory material management consists of planning, storing, and processing materials in the right place, right quantity, right quality, and the right time. in malaysia, inventory capability was focused on the garment industry by bin syed, mohamad, rahman, and suhaimi (2016). the purpose of the inventory management capability of this research was to evaluate the association between inventory management and company performance. arrangements between the evaluation of the company's performance and inventory management were identified based on days on inventory and). days on inventory referred to identify the number of days it would be required to convert turnover from the inventory. high inventory piled up for the long term is not favorable for the company which is the major factor for business failure. return on assets (roa) can be defined as net profit generated after the tax has been paid divided by the company's total assets. results indicated a direct connection between increased values on assets (roa) and days on inventory. it was examined the connotation between inventory capability and firm performance covering the period of 19922002 by roumiantsev and netessine (2005). in this study, traditional variables e.g. lead time margins and inventory levels were used and found there was no connection between the reduced level of inventory and greater enactment of assessment in terms of increased values on assets (roa). shin, ennis, and spurlin (2015) evaluated the affiliation between firm performance and inventory capability which reveals that a lower margin of inventory acquires a higher profit. koumanakos (2008) evaluated the inventory management effects on the firm performance grounded on varieties of industrial sectors namely textile, food, and chemicals representing the period of 20002002 in greece. the purpose was to evaluate the connection between inventory management capability and firm performance. the study focused on the traditional measurement e.g. levels of inventory, lead time, and demand. the analysis also revealed that the firm maintains a high level of inventory that leads to a lower rate of return. kimaiyo and ochiri (2014) stated management of inventory refers to systems about monitoring the inventory, reduction of cost, lead time, and demand of suppliers affect the firm performance. the study also focused that stock holding and cost of the order will improve the performance, inventory management systems reduce cost and in turn generate more profit. shardeo (2015) examined the special consequences of inventory competency on the performance of the garment industry. it was revealed the positive association between firm competency and inventory turnover. it was also examined various factors that are important to know the concept of inventory management e.g. costs about inventory, costing methods of inventory, models of inventory, and controlling tools for inventory. costs about inventory entail ordering cost, purchase cost, carrying cost, and shortage cost. methods of inventory involve current price and standard price, weighted average, first-in-first-out (fifo), and last-in-fast-out (lifo). the model of the inventory consists of the economic order quantity (eoq), inventory controls related to activity-based costing analysis, maximum level, minimum level and reorder level of inventory. muiruri and mwangangi (2017) studied to show the effects of material management, warehousing activities with managing inventory. analysis disclosed that inventory has a great influence on firm performance in respect to material management and warehousing activities. various factors associated with inventory management capability namely cost-related factors, techniques of costing about inventory, methods of controlling the inventory, and various methods of inventory. cost related inventory factors include ordering cost, carrying cost, purchase, and stock out cost. techniques of costing about inventory include fifo, weighted average, lifo, and standard costing. models of inventory include eoq (economic order quantity). for controlling inventory, various methods like activity-based costing, minimum level, reorder level, maximum level, just in time, and outsourcing have significant effects on firm performance (shardeo, 2015). for effectively controlling inventory management, information technology plays a key role to efficiently manage the inventory system. studies reveal that capacity and demand-oriented factors have a strong influence on inventory management. demands of buyers always searching for quality of the product, flexibility, and delivery of the product. safety stock levels are affected by their regular demand for inventory management. the disparity of capacity adversely affected inventory management. sudden demand causes an increase or decrease in inventory level (basaran, 2013). h1: business strategies have mediating effects of cost associated aspects of inventory on firm performanceroa h2: business strategies have mediating effects of cost associated aspects of inventory on firm performanceimp h3: techniques of inventory and firm performanceroa are mediated by business strategies h4: techniques of inventory and firm performance-imp are mediated by business strategies copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 3 figure 1. illustrates the conceptual framework 3. the methodology of the study the structure developed in this study is specified in figure one. as elucidated previously, this structure consists five constructs: 'cost-related factors of inventory, and ‘techniques of inventory', are treated as independent paradigms, 'business strategy' is considered as an intermediating paradigm, and 'return on asset (roa)’ and ‘improve productivity (imp)’are dependent constructs. 3.1 research instrument to collect data in this study, a questionnaire was served that comprises 39 questions dividing into separate elements. the preliminary portion contains 18queries of the respondents. it contains demographic information. the other portion contains 21 queries which are constructed based on likert scales (five points). these scales are developed based on distinguished authors namusonge, mukulu, and iravo (2017), bin syed et al. (2016), de sousa batista, de oliveira lisboa, augusto, and de almeida (2016), rakovska (2013), lynch, keller, and ozment (2000), zahra and covin (1993). 3.2 data collection the respondents in the questionnaires were experienced managers in 2018 from the upper export readymade garment in bangladesh. the questionnaires circulated among 450 people. 385 respondents out of 450 were correctly accomplished and were properly used. 3.3 reliability, validity and measurement scales the value of cronbach's alpha in this study was satisfactory and it was above 0.70. the value of cronbach's alpha in this studyinventory management capability 0.86, business strategies 0.91, and firm performance 0.81. meanwhile, the questionnaires were developed through borrow/ adjust from specialists. table 1. table of measurement items and factors loading (estimated) loading (standardized) error of standard critical ratio inventory management competency (α=0.86) imc1 imc2 imc3 imc4 imc5 0.985 1.000 0.940 0.888 0.774 0.972 0.850 0.841 0.758 0.896 0.073 0.051 0.644 0.554 23.562 22.974 21.890 26.760 business strategies (α=0.91) cost leadership strategies cost related factors of inventory techniques of inventory business strategy return on asset (roa) improve productivit y (imp) copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 4 cls1 cls2 cls3 differentiation strategies ds1 ds2 ds3 ds4 ds5 1.998 1.258 1.300 1.234 1.143 1.334 1.212 1.321 0.824 0.700 0.754 0.543 0.432 0.323 0.766 0.876 0.198 0.167 0.103 0.143 0.156 0.130 8.075 9.765 10.032 9.633 11.785 10.789 firm performance (α=0.81) roa imp 0.675 0.590 0.689 0.878 0.095 0.050 18.437 3.4 inventory management capability scale inventory management capability scale was measured by factors including cost of inventory management, shortages of frequency, inventory control techniques, the efficiency of inventory, long inventory days (namusonge et al., 2017; lwiki, ojera, mugenda, & wachira, 2013). 3.5 business strategies scale business strategies scale was measured based on cost leadership and differentiation strategies such as cost minimization, procurement efficiency, full capacity utilization, controlling overhead, methods, and tools of quality control number of a new product, rate of new product development (zahra & covin, 1993). 3.6 scale of firm performance firm performance scale refers to the extent of return on assets that were measured by total income before interest expense divided by total average assets (zhao, dröge, & stank, 2001). improve productivity was identified by the percentage of labor productivity-comparing percentage of labor productivity from the year of 20132015 (prajogo & shoal, 2006). 4. results 4.1 testing hypothesis in this research, for the data analysis, spss 23and amos 24 software was used. the questionnaire validity was identified through a load assessment procedure, confirmatory factor analysis, and extracted average variance. in the hypothesis portion and systematic results, friedman and spearman test of correlation, structural equation modeling, were engaged. for the testing hypothesis, the maximum alpha error was considered 0.05 (p ≥ 0.05). the mediation measurement was performed through regressions ensuring-references about baron and kenny, (1986). to get proper mediation, the study considered the meaningful coefficients of correlation among three paradigms (baron & kenny, 1986). table 2. coefficients of correlation among ever al paradigms mean standard deviation cost factors of inventory techniques of inventory business strategy roa cost factors of inventory 3.60 0.703 techniques of inventory 3.18 0.856 0.61** business strategy 3.64 0.944 0.52** 0.58** roa 3.53 1.10 0.55** 0.47** 0.18* imp 4.16 0.47 0.31** 0.46** 0.42** 0.55** * p< 0.05 **p< 0.01 according to the outputs, cost-related factors of inventory affect strategies of business in the garment industry (p<0.01). however, the results suggest that the structural prototypical strategy of the business has an important consequence on the return on assets of the firm (p<0.01). the standardized coefficient (β) effect of cost-related factors on strategies of the business that is equivalent to 0.711. the standardized coefficient of the effect of modest strategies on return on assets is copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 5 equivalent to 1.14. on the other hand, the standardized coefficient (β) of the impact of cost-related factors on improving productivity is equal to 0.17. all the positive hypothesis relationships are showing in this orientation. given the results, it can be summarized that the total effect of cost-related factors on firm performance (with the mediating role of business strategies) is significant. moreover, the standardized coefficient (β) of the techniques of inventory on business strategies is equal to 0.232 and the standardized coefficient of the impact of competitive strategies on return on asset is equal to 0.24. however, the standardized coefficient (β) of the impact of techniques of inventory on improve productivity is equal to 0.68. all the hypothesis relationships in this orientation are also positive. based on the results, it is summarized that the overall effects of techniques of inventory on firm competency (business strategies as a mediator) are also significant and supported the hypothesis. table 3. amos output independent construct mediating construct dependent construct amos findings result cost related factors of inventory business strategy return on asset (roa) s.c(β)= 1.14, p value = 0.001 and t value = 4.12. supported cost related factors of inventory business strategy improve productivity (imp) s.c(β)= 0.17, p value = 0.04 and t value = 3.78 supported techniques of inventory business strategy return on asset (roa) s.c (β) = 0.24, p value = 0.001 and t value = 5.65 supported techniques of inventory business strategy improve productivity (imp) s.c(β) = 0.68, p value = 0.03 and t value = 4.72 supported 0.711 1.14 0.232 0.068 figure 2. findings summary (rmsea=0.088; cfi=0.975; tli=0.943; df=129; and chi-square=293.15) (p< 0.05) 5. discussion the findings revealed that firm performance in readymade garment relies on cost-related factors and various techniques of inventory. the outcomes also propose that these factors and techniques of inventory can affect firm performance through business strategies. all the hypotheses (h1, h2, h3 & h4) identified the positive (+ve) relationship amongst related factors and techniques of inventory and firm performance (p ≤ 0.05). these hypotheses were maintained by preceding research shown by various authors (bin syed et al., 2016; roumiantsev & netessine, 2005; shin et al., 2015; koumanakos, 2008; kimaiyo & ochiri, 2014; shardeo, 2015). as controllable and in organizational factors, they provide firms to establish competitive business strategies required to enhance the organizational effectiveness and efficiency. although the many competitions in the readymade garment industry, bangladeshi manufacturers should continuously-proceed phases to advance intra-organizational aspects resulting intensify firm activities progressively. it's necessary to use enterprise resource planning (erp) for the further development of the production roa cfi toi bs imp copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 6 process. garment manufacturers should give effort to have comprehensive control over the production processes and quality of inventory. from the above findings, numerous contributions have been identified for the theory with the practice of inventory management. at first, logistics can be interlinked with strategic management by developing a new framework with theory. secondly, present research contributes to the readymade garment industry about the new information for the rbv researches. thirdly, the analysis engages a model concerning structural equation to test the hypothesis which supports consistency in clarifying the output. finally, this issue highlights managers dedicating a vigilant deliberation to interior factors that they can maintain to lower the costs that allow the readymade garment factories in bangladesh to take its place around the international market. 6. conclusion inventory management consists capable to forecast and measurability of inventory management practices that reduce cost and provides inventory control efficiency. inventory is the most significant portion of any business, particularly for the garment industry. it is hidden charges which are to be measured for sustaining in the recent competitive world. besides costs, improve productivity is also a crucial part of the garment industry. inventory management also advances the level of productivity to survive in the present world. so, a garment manufacturing firm indispensable to fix the best practices regarding inventory monitoring to expand the return of assets in addition to productivity improvement. planning inventory is an important part that is to be done effectively and efficiently. without efficient inventory planning, the firm cannot be reached at the optimum level of inventory management strategy as well as a business strategy. it's important to discourse that few limitations exist in the present issues. at first, this research attentive in business strategies e.g. cost leadership with differentiation strategies, which does not fulfill the third party logistics strategy. secondly, the results of current issues were related to readymade garment factories particularly firms engaged with export concerning making, packaging, and cutting systems. some variables were restricted to some extent in respondents' query e.g. improve productivity, increased value in assets. finally, due to confidential data, it was gathered based on the experienced manager's observations. one can investigate further negotiation skills and experienced personnel for strategic purchasing. strategic cost control and firm performance could be further researchable work. references alam, m. s., & natsuda, k. (2016). the competitive factors of the bangladeshi garment industry in the post-mfa canadian journal of development studies/revue canadienned'études du développement, 37(3), 316-336. baron, r. m., & kenny, d. a. (1986). the moderator-mediator variable distinction in social psychological research: conceptual, strategic, and statistical considerations. journal of personality and social psychology, 51(6), 1173. barney, j. (1991). firm resources and sustained competitive advantage. journal of management, 17(1), 99-120. başaran, b. (2013). effects of operational and structural conditions on inventory management in large manufacturing enterprises. istanbul university journal of the school of business administration, 42(1). bin syed, s. j. a. n., mohamad, n. n. s., rahman, n. a. a., & suhaimi, r. d. s. r. (2016). a study on the relationship between inventory management and company performance: a case study of the textile chain store. journal of advanced management science, 4(4). bozarth, c. c., handfield, r. b., & chandiran, p. (2008). introduction to operations and supply chain management. upper saddle river, nj: pearson prentice hall. bgmea. (2016). bangladesh garment manufacturers and exporters association. retrieved from http://www.bgmea.com.bd/ dey, p. k., & sumon, m. t. h. (2011). effects of the post-multi-fiber agreement on bangladesh readymade garments sector. n.p.: lap-lambert academic publishing de sousa batista, p. c., de oliveira lisboa, j. v., augusto, m. g., & de almeida, f. e. b. (2016). effectiveness of business strategies in brazilian textile industry. revista de administração, 51(2), 225-239. farahani, r., & rezapour, s. (2011). logistics operations and management: concepts and models. n.p.: elsevier. kimaiyo, k. k., & ochiri, g. (2014). role of inventory management on the performance of manufacturing firms in kenya–a case of new kenya cooperative creameries. european journal of business management, 2(1), 336-341. koumanakos, d. p. (2008). the effect of inventory management on firm performance. international journal of productivity and performance management, 57(5), 355-369. lwiki, t., ojera, p. b., mugenda, n. g., & wachira, v. k. (2013). the impact of inventory management practices on the financial performance of sugar manufacturing firms in kenya. international journal of business, humanities, and technology, 3(5), 75-85. lynch, d. f., keller, s. b., & ozment, j. (2000). the effects of logistics capabilities and strategy on firm performance. journal of business logistics, 21(2), 47. http://www.bgmea.com.bd/ copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 2; 2020 7 muiruri, k. m., & mwangangi, p. (2017). influence of inventory management of the performance of the energy sector in kenya: a case of kenya power limited. namusonge, e., mukulu, e., & iravo, m. (2017). influence of procurement capabilities on firm performance of manufacturing entities in kenya. international journal of academic research in business and social sciences, 7(2), 507-520. nuruzzaman, m. (2013). improving the competitiveness of readymade garment (rmg) industry of bangladesh-analysis of supply chains (doctoral dissertation). n.p prajogo, d. i., & sohal, a. s. (2006). the relationship between organization strategies, total quality management (tqm), and organization performance––the mediating role of tqm. european journal of operational research, 168(1), 35-50. rakovska, m. (2013). the impact of strategy and logistics on performance: a methodological framework. research in logistics & production, 3. roumiantsev, s., & netessine, s. (2005). should inventory policy be lean or responsive? evidence for us public companies. saxena, s. b., & salze-lozac’h, v. (2010). competitiveness in the garment and textiles industry: creating a supportive environment: a case study of bangladesh. n.p shardeo, v. (2015). impact of inventory management on the financial performance of the firm. iosr journal of business and management (iosr-jbm), 01-12. shin, s., ennis, k. l., & spurlin, w. p. (2015). effect of inventory management efficiency on profitability: current evidence from the us manufacturing industry. journal of economics and economic education research, 16(1), 98. zahra, s. a., & covin, j. g. (1993). a business strategy, technology policy, and firm performance. strategic management journal, 14(6), 451-478. zhao, m., dröge, c., & stank, t. p. (2001). the effects of logistics capabilities on firm performance: customer‐focused versus information‐focused capabilities. journal of business logistics, 22(2), 91-107. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). asian finance & banking review vol. 5, no. 1; 2021 issn 2576-1161 e-issn 2576-1188 published by cribfb, usa 19 effects of selected company-specific variables in the determination of company leverage: evidence from textile industry of bangladesh md asaduzzaman arif lecturer school of business ahsanullah university of science and technology, bangladesh e-mail: a.arif.du13@gmail.com abstract the purpose of this study is to investigate the effects of profitability, liquidity, size, tangibility, and asset turnover on the leverage of the textile industry of bangladesh. this paper analyzed 20 companies out of 56 companies listed in the dhaka stock exchange. the data set is for the periods from 2016 to 2019. to find the effects on the dependent variable, the fixed effects model has been used which has been selected using the hausman test. to test heteroskedasticity, the breusch-pagan heteroskedasticity test has been used. the study found size, profitability, and tangibility having a significant effect. while size and tangibility have a positive impact on leverage, profitability has a negative impact. the findings are diversified in nature. the results are not all consistent with the previous studies conducted in different developing countries. so, the policymakers should have in-depth insights while making decisions. keywords: leverage, profitability, size, liquidity, asset turnover, tangibility. introduction the capital structure decision is always one of the most important decisions for a firm. because of any wrong movement towards designing the capital structure, a firm may face the threat of bankruptcy or sometimes may end in bankruptcy. the capital of a firm combines equity, debt, and preferred stock. firms take debt for enjoying tax benefits from interest payments. on the other hand, excessive debt in the capital structure increases the probability of default. therefore, firms need to set up debt at an optimum level. but what is the optimum level of debt? what are the determinant factors of firms’ leverage? are always in question to the financial researchers. in this paper, therefore, our objective is to find out the effect of five factors – profitability, liquidity, asset turnover, tangibility, and company size – on the capital structure of the firms trading in the textiles industry in bangladesh. textile industry is the most important sector for the economic survival of bangladesh. of the total export, this particular sector covers 80% or more. in the year 2019, the total export from textiles was 29.21 billion dollars which was 83% of the total export. also, it is experiencing rapid growth holding the second-largest textile export share in the world. so, the importance of this sector for the economic boost up of bangladesh is beyond description. according to the literature, the capital structure determinants of firms are classified into two categories: (a) the macroeconomic factors (country specific factors) that affect all the firms in https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 20 the economy (for instance, inflation, tax, and interest rate in the money market) (b) the companyspecific factors such as liquidity, asset turnover, tangibility, profitability, and company size. considering that the macro factors are common and existing in every industry, in our research we will try to find out the effect of five company-specific factors on the level of debt in the capital structure of the companies trading in the textile industry of bangladesh. till now, no paperwork has been carried on in this context in bangladesh. so, there is a lack of investigating a comparative effect in this context. the pecking order theory argues that firms will finance from internal sources first, then they will go for borrowed capital and then from the equity issues. according to this theory, it can be assumed that firms having high profitability will have a low level of debt and firms having low profitability will have a high level of debt in their capital structure. therefore, the profitability variable is the best fit as an explanatory variable in this model. banks and financial institutions will be more confident in lending large corporations as they have diversified sources of activities. so, there will be a positive relationship between leverage and company size. (titman & wessels, 1988) liquidity exerts a negative impact on the leverage of firms. as firms will finance from their internal sources first. (ozkan, 2001) firms having a high proportion of current asset would have a low level of debt and firms having a higher level of non-current tangible assets would have high debt level in the capital. (mayers s. , 2003) from this literature, the tangibility of assets has been incorporated as an independent variable in the model of our research. in this paperwork, we would like to develop a model containing the variables that affect the leverage of textile firms significantly. in the second part we put some prominent capital structure theories. the third and fourth part contains the literature review and research output and discussions respectively. literature review dakua (2019) investigated the effects of capital structure determinants and their correlation with the company leverage on the indian steel industry using data set 2010 to 2017. in his study, seven key determinants have been found: they are profitability, asset structure, size, growth opportunities, non‐debt tax shield, liquidity, and risk. the profitability is found to be highly correlated with the debt ratio as was expected and reported in previous studies. the correlations among the determinants such as asset structure, size, and non‐debt tax shield are statistically significant. profitability and liquidity carry positive relationship with debt ratio, although there is a negative relationship between debt ratio and asset structure. (dakua, 2019) frank and goyal (2003) studied a broad cross-section of american publicly traded firms using data set from 1971 to 1998 to find the pecking order theory of corporate leverage and the result showed firm size is irrelevant in debt issues. rather, they found that net equity issues track the financing deficit more closely than do net debt issues. (frank & goyal, 2003) frank and goyal (2009) studied american publicly traded firms using data set from 1950 to 2003 to find the relevant factors to the capital structure decisions. in this study, they used both market leverage and book leverage as explained variable and median leverage, expected inflation, tangibility, market to book assets ratio, the log of assets, and profits as explanatory variable. the result showed a positive impact of median industry leverage, the log of assets expected inflation and tangibility and negative impact of the market to book assets ratio and https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 21 profits on leverage. also, they found that dividend‐paying firms tend to have lower leverage. and somewhat similar effects were found when book value leverage was considered. however, for book value leverage, the insignificant impact of firm size, the market‐to‐book ratio, and the effect of inflation was found (frank & goyal, 2009). gropp and heider (2010) using 1991 to 2004 large us and european banks data tried to find out the determinant factors of bank capital structure and found that deposit insurance mispricing and capital regulation were second-order important in the capital structure determination. (gropp & heider, 2010) rajan and zingales (1995) studied the major industrialized public limited firms to investigate the capital structure choice by these firms. their findings show that at an aggregate level firm leverage is quite similar across g-7 countries. (rajan & zingales, 1995) titman and wessels (1988) investigated the explanatory power of capital structure theories. they found volatility, collateral value, non-debt tax shield, and future growth have an insignificant impact on debt ratios. (titman & wessels, 1988) shah and khan (2007) investigated kse listed non-financial firms for the period 19942002 to find the determinant factors of capital structure. they used the fixed effect dummy variables regression model. using six explanatory variables, they found three variables significant. their results found tangibility has a positive effect indicating the acceptance of tradeoff theory whereas the earning volatility and depreciation variables did not conform to trade-off theory. the agency theory has been hypothesized by the growth variable whereas profitability confirms the predictions of pecking order theory. size is the only variable that does not conform to any of the theories. (shah & khan, 2007) hossain and ali (2012) tried to find out the effect of company-specific factors on company leverage using a sample of 39 companies listed on the dhaka stock exchange (dse). they used liquidity, profitability, non-debt tax shield, tangibility, managerial ownership, earnings volatility, size, growth opportunity, dividend payment, and industry classification. they found liquidity, profitability, tangibility, and managerial ownership have a significant negative effect on leverage whereas growth opportunity and non-debt tax shield having a positive effect on leverage. (hossain & ali, 2012) akhtar (2005) tried to find the determinants of capital structure by conducting an investigation from 1992 to 2001 on a sample of australian multinational and domestic corporations using cross-sectional tobit regression analysis. the results show that the level of leverage does not differ significantly between multinational and domestic corporations. both types of corporations show that profitability, growth, and size are significant factors in the determination of leverage as well as collateral value has been found significant determinant of leverage for domestic corporations. bankruptcy costs and the level of geographical diversification have been found significant for multinational corporations but bankruptcy cost has been found insignificant for domestic corporations. with interaction effects, bankruptcy costs and profitability are significant in explaining multinational leverage relative to domestic leverage. (akhtar, 2005) zeitun and saleh (2015) studied the impact of leverage on firm performance on gulf cooperation council (gcc) countries. the authors use a panel data to examine the effect of financial leverage on firm’s performance using the dynamic generalized method of moments (gmm) estimator. the results from the gmm estimator show that companies’ leverage is a significant determinant of firm’s performance in gcc countries. (zeitun & saleh, 2015) https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 22 firms’ tradeoff their operating and financial leverage during good economic times, but do not engage in the tradeoff behavior during recessionary times. (dugan, medcalfe, & park, 2018) chadha and sharma (2016) studied the impact of capital structure or financial leverage on firm financial performance using 422 manufacturing countries listed in bombay stock exchange (bse). it was found that financial leverage has no impact on the firm’s financial performance parameters of return on asset and tobin’s q. however, it is negative and significantly correlated with return on equity. (chadha & sharma, 2016) kizildag and ozdemir (2016) used both the firm specific factors and macroeconomic factors to find the ups and downs in the firms leverage using data set from 1990 to 2015 of firms in tourism industry of us. they took account of the recent economic upheaval in their analyses so that they can compare firms’ leverage behavior as “before” and “after” the major economic turmoil in 2007–2009 periods. their article complements previous work by examining whether leverage factors demonstrate discrepancies from the prior findings and by proposing rigorous industry-specific outlook and solution for the financial leverage literature. (kizildag & ozdemir, 2017) data and methodology defining variables in an empirical study, one of the most important tasks is selecting dependent and explanatory variables. for this work, the variable selection idea has been taken from the previous studies conducted by different researchers. for example, laura serghiescu and viorela ligia vaidean (2014) have tried to find if there is any relationship between debt ratio and profitability, asset size, liquidity, tangibility, and asset turnover. they used the ordinary least square method and fixed effects model, simple and multiple regression. in their study, they took the long term and short-term debt to total assets ratio as the debt ratio of a firm. (serghiescu & vaidean, 2014) in another study, rajan and zingales (1995) used different capital structure measures. in their study, they used total capital less total equity to total assets as a debt ratio. (rajan & zingales, 1995) in this research, the variables have been selected as follows. explained variable: debt ratio = 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 total long-term debt and short-term loans and working capital loans have been considered in the numerator of debt ratio which indicates the actual leverage of a firm. accounts payables, deferred liabilities etc. have not been considered as they do not indicate the actual leverage in the firms’ capital structure. explanatory variables the profitability of the firms: profitability = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐵𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑇𝑎𝑥𝑒𝑠 (𝐸𝐵𝐼𝑇) 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 the pecking order theory states a negative relationship between profitability and debt level of a firm as firms first finance from internal sources. on the contrary, trade-off theory states a positive relationship between profitability and leverage of a firm as firms finance through debt to reap the tax shield advantages from interest payment (kraus & litzenberger, https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 23 1973). although most empirical researches have proven the absence of trade-off theory in practice showing a negative relationship between profitability and leverage of a firm leaning pecking order theory to be existing practically. (mazur, 2007) company size: size = ln (total assets) log normal value (in) of total assets have been considered for analytical purpose. a large number of diversified research results have been found while finding a relationship between the size and debt ratio of a firm. large corporations have diverse activities and so have less risk of bankruptcy. therefore, large corporations seem to have more debt in their capital which means the company size and the leverage are positively correlated (titman & wessels, 1988). although theories may not hold all the time practically. studying large corporations, hossain and ali (2012) found that large corporations may have easy access to the capital market and so the size and leverage have a negative relationship. (hossain & ali, 2012) the tangibility of assets: tangibility = 𝑁𝑜𝑛−𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑡𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 firms holding a large portion of fixed tangible assets indicate less probability of falling into financial distress. therefore, lenders get an assurance of being paid for their debt even if the firm falls in financial distress. considering this case, the tangibility of assets has been taken into consideration as an explanatory variable in this paper. therefore, there seems to have a positive relationship between tangible assets in the total assets structure and the level of debt of a firm as having more tangible assets is regarded as a guarantee to the lenders. tangibility increases leverage (gomez, castro, & ortega, 2016) on the other hand, more tangible assets in asset structure and the level of debt in developing countries are negatively correlated (nivorozhkin, 2002). as, in developing countries, the underdeveloped legal system causes a delay in the repayment to lenders in case of bankruptcy. asset tangibility and leverage have a negative relationship, proven in studies of several researchers. (shah & khan, 2007) (abdullah, 2005). liquidity of the assets (liquidity): liquidity = 𝐶𝑎𝑠ℎ 𝑎𝑛𝑑 𝐶𝑎𝑠ℎ 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 pecking order theory states that firms having high liquidity depends on internal sources of financing. so, liquidity puts a negative impact on the leverage of a firm (ozkan, 2001). so, liquidity can surely be an important determinant of a firm’s capital structure. thus, liquidity in the asset structure has also been considered as an explanatory variable. liquidity conforms with the pecking order theory and therefore, shows a negative impact on the leverage of firms. (sheikh & wang, 2010) asset turnover: asset turnover = 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 24 asset turnover indicates the efficiency of the company. it indicates the number of times the company’s capital is invested to earn the company’s total assets. a high turnover leads to more capital to be invested indicating a positive relationship between asset turnover and firm leverage. whereas, a low turnover indicates less capital requirement and thus a low level of debt in the capital structure. asset turnover has a positive impact on the debt level of a firm. (hutchinson & hunter, 1995) data collection for the analysis purpose, four years of data (2016-2019) of 20 listed companies in the dhaka stock exchange who are operating in the textiles sector of bangladesh have been collected. all the data are secondary data collected from the financial statements of the companies published on their websites. methodology and analytical models laura serghiescu and viorela ligia vaidean (2014) used the ordinary least squares (ols) and fixed effects model, single and multiple regression in their study of ‘determinants factors of capital structure of a firm (study conducted on the romanian construction sector firms) (serghiescu & vaidean, 2014). pornpen thippayana (2014) in his paper on determinant factors of capital structure in thailand tried to find the impacts of explanatory variables on explained variables using the multiple regression model. (thippayana, 2014) multiple regression model has been used in the study to determine the effects of profitability, company size, tangibility, liquidity, and assets turnover. therefore, the econometric model for the multiple regression analysis stands for this research as follows: debt_ratio i,t = α + β1*profitability + β2*size + β3*tangibility + β4*liquidity + β5*asset_turnover + ɛ i,t i = company, t = covered time period α = constant value (value of debt when all independent variables are zero) β1 to β5 all are the coefficients of the independent variables of the regression ɛ = error term (normally distributed error term with an assumed mean value of 0) as the study has been conducted on panel data, the fixed effects model has been used as a statistical model and the perfection of the fixed effects model over random effects model has been determined using hausman test. to test the central tendency of data, descriptive statistics have been used. descriptive statistics descriptive statistics present the mean, minimum, maximum, and standard deviation of the variables used in the study. the descriptive statistics of the variables used in this study is as follows: table 1. descriptive statistics mean max med min std. dev. obs. debt_ratio 0.258 0.61 0.23 0.01 0.1540 80 asset_turnover 0.661 2.96 0.52 0.09 0.5479 80 https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 25 liquidity 0.102 0.37 0.09 0.01 0.0839 80 log_size 21.55 22.13 21.40 21.25 0.3470 80 profitability 22.018 23.6 22.19 19.29 0.8991 80 tangibility 0.473 0.83 0.43 0.19 0.1269 80 total_assets 5066.6 17791 4331 238 3861.1 80 descriptive statistics shows the central tendency of the variables used in the research. the descriptive statistics above shows that the mean debt ratio is 0.258 with a minimum value of 0.01 and a maximum value of 0.61. the mean asset turnover is 0.6615 with a minimum of 0.09 and a maximum of 2.96. the average liquidity of the firms is 0.1021 with a minimum ratio of 0.01 and a maximum ratio of 0.37. total assets has been considered as the size of the firm. therefore, the mean size of the firm is 5066.64 mn with a minimum value of 238 mn and a maximum value of 17791 mn. the mean profitability of the firms is 22.018 with a minimum of 19.29 and a maximum of 23.6. the mean tangibility of assets is 0.473 with a minimum of 0.19 and a maximum of 0.83. correlation among variables table 2. correlation matrix dr prof. size_ta tang. liq. asset_to dr 1 prof. -0.059 1 size_ta 0.117 -0.429 1 tang. 0.485 -0.051 0.313 1 liq. -0.231 0.405 -0.618 -0.522 1 asset_to -0.217 0.228 -0.535 -0.486 0.682 1 the correlation matrix above shows that there exists no strong correlation between any two variables and there exists no multicollinearity problem among the variables. variance inflation factors (vif) and multicollinearity the vif model is an indicator of the presence of multicollinearity in the data set. it estimates the multicollinearity problem within the mean value of 10 or more. if the value remains below 10, it indicates there is no multicollinearity. and if the value is more than 10, it indicates a multicollinearity problem in the data set. table 3. vif test variable vif 1/vif profitability 1.34 0.7448 log_size 1.81 0.5515 tangibility 1.49 0.6691 liquidity 2.67 0.3743 asset_turnover 2.06 0.4855 mean vif 1.88 https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 26 the above table indicates that the mean vif is 1.88 which is below 10. so, there exists no multicollinearity problem in the model. research findings and discussion the probability value of the hausman test is 0.0000 which is less than our critical value of 0.05 indicating that we can reject the null hypothesis meaning the fixed effect model is appropriate in our analysis. heteroskedasticity test there are several tests used to find out whether the data are heteroskedastic or homoscedastic. in our analysis, we used the breusch-pagan test to test the heteroskedasticity of the data. the hypotheses for the test are as follows: ho: constant variance (not heteroskedastic) h1: inconstant variance (heteroskedastic) table 4. breusch-pagan test result summary chi2(1) prob > chi2 2.40 0.1210 the test shows that the p-value is higher than 0.05 meaning that we cannot reject the null hypothesis. therefore, it indicates that the data are homoscedastic. hausman test in panel data analysis, two types of models are mainly used. one is the fixed effect model and the other is the random effect model. hausman indicates the best fit model for a specific set of panel data. the hypotheses are: ho: random effect model h1: fixed effect model table 5. hausman test result summary test summary chi-sq. df chi-sq. statistic prob cross section random 5 125.86 0.0000 debt _ratio fixed random difference profitability -1.783118 -0.8028673 -0.9802506 log_size -0.090234 -0.0529404 -0.0372936 tangibility 0.4014503 0.4798101 -0.0783598 liquidity -0.1468696 -0.0746773 -0.0721923 asset turnover 0.250492 0.0522698 0.1982222 the result above shows that the p-value 0.0000 is lower than 0.05 meaning that we can reject the null hypothesis and the fixed effect model is the best fit model for this analysis. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 27 fixed effect model table 6. fixed effect model results variable coefficient std. error t-statistic prob. c 0.977945 0.907025 1.078189 0.2857 asset_turnover 0.032789 0.082230 0.398746 0.6916 liquidity -0.063428 0.226135 -0.280488 0.7802 log_size 0.064488 0.028507 2.262174 0.0277* profitability -0.103970 0.045128 -2.303882 0.0250* tangibility 0.347175 0.124627 2.785704 0.0073* * significant at 5% level of significance r-squared 0.850410 mean dependent var 0.258000 adjusted r-squared 0.785135 s.d. dependent var 0.154095 f-statistic 13.02802 durbin-watson stat 1.196140 prob(f-statistic) 0.000000 p-value is 0.0000 which is less than 0.05 and f-statistic is 13.03 indicating that the model is robust and significant. r-squared and adjusted r-squared are 0.8504 and 0.7851 respectively which means 78.51% predictability of the dependent variable is covered under this model by the independent variables. the table above shows a positive constant of 0.9779 meaning that without the presence of any independent variable covered under this model, there will still be some leverage in the firms. among the variables studied company size, profitability and tangibility are significant variables. company size shows a positive influence on the level of leverage of a firm. and this result is consistent with the previous study which showed the company size and the leverage are positively correlated. (titman & wessels, 1988) tangibility shows a positive influence on the leverage of a firm which is consistent with the theory as stated in the data and methodology section. but the result is inconsistent with the previous concept of nivorozhkin (2002) has shown a negative correlation between having more tangible assets in asset structure and the level of debt in developing countries. (nivorozhkin, 2002) profitability shows a negative coefficient which is consistent with the pecking order theory. the pecking order theory states a negative relationship between the profitability and debt structure of a firm as firm’s first finance from internal sources and the result is consistent with the empirical study conducted by (onofrei, tudose, durdureanu, & anton, 2015). among the insignificant variables, liquidity shows a negative relationship with the debt structure of the firm and the result is consistent with the previous study which shows liquidity puts a negative impact on the leverage of a firm (ozkan, 2001). asset turnover shows a positive relationship with the debt level. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 28 conclusion textile industry is the major foreign currency earning source of bangladesh, not bangladesh only but some other developing countries like vietnam, india etc. firms in this industry are mainly dependent on debt financing for meeting up the capital requirement. financial scientists have always tried to give a framework on the optimum level of debt for a firm. but it has been always a challenge for them to conclude because capital structure selection is completely a firm’s internal decision. however, no one acts irrationally and so in the study the intention was to find out the firm-specific factors that influence the capital structure decision of a firm. taking 20 listed companies of dse, in this study we found 3 variables significant (company size, profitability, and tangibility) among the 5 variables studied (company size, profitability, tangibility, liquidity, and asset turnover). using the fixed effect model, this paper found 85.04% r-squared value and 78.51% adjusted r-squared value which proves the robustness of our model for predicting the leverage of the textile industry in bangladesh. references abdullah, a. m. (2005). capital structure and debt maturity: evidence from listed companies in saudi arabia. journal of business & economics, 11, 15-33. akhtar, s. (2005). the determinants of capital structure for australian multinational and domestic corporations. australian journal of management, 30(2), 321-341. chadha, s., & sharma, a. k. (2016). capital structure and firm performance: empirical evidence from india. the journal of business perspective, 19(4), 295-302. dakua, s. (2019). effect of determinants on financial leverage in indian steel industry: a study on capital structure. international journal of finance & economics, 24(1), 427-436. dugan, m. t., medcalfe, s. k., & park, h. s. (2018). a reconsideration of operating-financial leverage tradeoff hypothesis. journal of financial economic policy, 10(4), 473-483. frank, m. z., & goyal, v. k. (2003). testing the pecking order theory of capital structure. journal of financial economics, 67, 217-248. frank, m. z., & goyal, v. k. (2009). capital structure decisions: which factors are reliably important? journal of financial management, 38(1), 1-37. gomez, a. p., castro, g. a., & ortega, m. f. (2016). determinants of leverage in mining companies, empirical evidence for latin american countries. contaduría y administración, 61(1), 26-40. gropp, r., & heider, f. (2010). the determinants of bank capital structure. review of financial journal, 14(4), 587-622. hossain, f., & ali, a. (2012). impact of firm specific factors on capital structure decision: an empirical study of bangladeshi companies. international journal of business research and management (ijbrm), 3(4), 163-182. hutchinson, r., & hunter, r. (1995). determinants of capital structure in the retailing sector in the uk. the international review of retail, distribution and consumer research, 5(1), 63-78. kizildag, m., & ozdemir, o. (2017). underlying factors of ups and downs in financial leverage overtime. tourism economics, 23(6), 1321-1342. kraus, a., & litzenberger, r. (1973). a state-preference model of optimal financial leverage. journal of finance, 28(4), 911-922. mayers, s. (2003). financing of corporations. handbooks of the economics of finance, 1(1), 216-253. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 29 mayers, s., & majluf, n. (1984). corporate financing and investment decisions when frms have information that investors do not have. journal of financial economics, 13(2), 187-224. mazur, k. (2007). the determinants of capital structure choice: evidence from polish companies. int advanced econ res, 13(4), 495-514. nivorozhkin, e. (2002). capital structures in emerging stock market: the case of hungary. the developing economies, 40(2), 166-187. onofrei, m., tudose, m. b., durdureanu, c., & anton, s. g. (2015). determinant factors of firm leverage: an empirical analysis at iasi county level. procedia economics and finance, 20, 460-466. ozkan, a. (2001). determinants of capital structure and adjustment to long run target: evidence from uk company panel data. journal of business finance & accounting, 28(1-2), 175-198. rajan, r. g., & zingales, l. (1995). what do we know about capital structure? some evidence from international data. the journal of finance, 50(5), 1421-1460. serghiescu, l., & vaidean, v. l. (2014). determinant factors of the capital structure of a firm an empirical analysis. procedia economics and finance, 15, 1447-1457. shah, a., & khan, s. (2007). determinants of capital structure: evidence from pakistani panel data. international review of business research papers, 3(4), 265-282. shah, a., & khan, s. (2007). determinants of capital structure: evidence from pakistani panel data. international review of business research papers, 3, (4), 265-282. sheikh, n., & wang, z. (2010). financing behavior of textile firms in pakistan. international journal of innovationa, management and technology, 1(2), 130-135. thippayana, p. (2014). determinants of capital structure in thailand. procedia social and behavioral sciences, 143, 1074-1077. titman, s., & wessels, r. (1988). the determinants of capital structure choice. journal of finance, 43(1), 1-19. zeitun, r., & saleh, s. a. (2015). dynamic performance, financial leverage and financial crisis: evidence from gcc countries. euromed journal of business, 10(2), 147-162. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0) asian finance & banking review; vol. 2, no. 2; 2018 issn 2576-1161 e-issn 2576-1188 impact factor: 3.3 published by centre for research on islamic banking & finance and business 19 the impact of exchange rate on foreign private investment in nigeria leonard nosa aisien ph.d senior lecturer department of economics, banking and finance faculty of social and management sciences benson idahosa university benin city, nigeria email: laisien@biu.edu.en received: november 6, 2018 accepted: november 10, 2018 online published: november 17, 2018 abstract the study examined the impact of exchange rate on foreign private investment using quarterly time series date from nigeria for the period 2007 to 2017. foreign private investment in the study was disaggregated into foreign direct investment and foreign portfolio investment in order to ascertain their separate reactions to changes in the exchange rate of the naira against the us dollars. the empirical analysis was based on the var estimation procedure using three lagged periods adopted on the basis of various lag order selection criteria. the empirical result revealed that devaluation/depreciation of the naira adversely affects foreign direct investment and foreign portfolio investment in nigeria. increased in the size of the domestic market and development of the financial sector were found to stimulate foreign private investment while high inflation rate in the domestic economy discourages foreign private investment in nigeria. the study, therefore, recommended among others that the central bank of nigeria should continue to initiate more proactive policy intervention policies to stabilize the exchange rate of the naira in order to stimulate more foreign private investment in nigeria. keywords: foreign direct investment, foreign portfolio investment, foreign private investment, exchange rate, financial development. jel classification: f21, f31, p45 1. introduction the importance of foreign capital inflows in the economic life of the host country cannot be over emphasized. foreign capital plays a pivotal role in the economies of both developed and developing countries. foreign capital inflows played a major role in the development of currently industrialized countries in their course of economic advancement. in the developing countries, foreign capital inflow can contribute significantly to the advancement of the host country by helping to fill the savings investment gap. in most countries of sub-sahara africa including nigeria, the domestic savings fall short of the required investment level needed to launch the economies to the path of sustainable development. this creates the problem of savings – investment gap. also, there is the problem of foreign exchange shortage resulting from excessive demand for foreign goods occasioned by the weak productive base of these sub-sahara africa countries. in order to close this dual gap between savings and foreign exchange, foreign capital inflow becomes very crucial. hence, the government of most developing countries in their policy formulation have accorded stimulation of foreign capital inflow top priority. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 20 according to obadan (2004), external capital flows can be categorized into official development finance, export credit, and foreign private capital flows. foreign private investment is a component of the foreign private capital flows. it provides a greater proportion of the needed finance to boost the use of existing capacity and stimulate new investment in the host countries. the inflow of foreign private investment helps to boost the stamina of the host country towards achieving its economic potentials. since the 1980’s, there has been increased private capital flow across international borders globally. however, despite this increased global flow of capital, especially into developing economies, sub-sahara africa countries still lag behind other regions in attracting foreign private capital (osinubi & amaghionyeodiwe, 2009). according to obadan (2004), the distribution of private capital flow to regions and countries has been highly skewed against subsahara africa countries. from the world bank (1996), east asia, latin america, and the caribbean dominated the inflow of the private capital flow in the 1990’s. east asia and the pacific accounted for 43.1% of the total private capital inflow, latin america and the caribbean 35.6%, europe, and central asia 13.2%, while sub-sahara africa accounted for just 2.4%. the middle east and north africa accounted for 1.9%. this disparity in the geographical distribution of foreign private capital inflow has become a source of worry to the authorities of sub-sahara africa countries. this is based on the general assumption that foreign private investment is very crucial in stimulating growth in developing economies where domestic capital is grossly inadequate. foreign private investment particularly fdi is not just a source of capital formation, it also serves as a source of technological development. technological development result from the transfer of productive technology, innovative capacity, skills development and improvement in organizational and managerial capacities. given the importance of foreign private investment in developing countries, several studies have been conducted on the key determinants of foreign private capital inflow in developing countries. from both theoretical and empirical studies, several determinants of foreign private capital inflow into a host country have been identified. however, one of the key determinants that have been a source of prolonging controversy is the exchange rate. from available international economics literature, some empirical findings show that exchange rate volatility impacts positively on foreign private capital inflow, while others discover a negative impact. however, a close study of available literature in this direction shows that majority of the study employed annual time series date which may not adequately capture the volatility of the exchange rate compared to high frequency data such a quarterly or monthly data. most importantly, the majority of the studies only focused their attentions on foreign direct investment (fdi) which is just a component of foreign private investment. foreign portfolio investment which is an important part of the foreign private investment is often left out in their analysis. the noninclusion of portfolio investment in these studies amount to telling only a part of the story. although, fdi is a key source of technological transfer, however, portfolio investment plays a key role in the economy via the capital and money market. moreover, portfolio investment is more volatile than fdi due to easy transfer. the reaction of fdi and portfolio investment to exchange rate volatility may differ significantly. therefore, to assess the effect of exchange rate on foreign private capital inflow, an all embracing analysis covering fdi and foreign portfolio investment is necessary. this is the dimension this study wish to address. therefore the objective of this study is to examine the impact of exchange rate on foreign private investment (disaggregated into fdi and foreign portfolio investment) using quarterly time series data from nigeria for the period 2007 to 2017. this paper is structured into five sections. apart from section one which is the introduction, section two deals with the review of the relevant literature. section three covers the theoretical framework and model specification, while section four contains the empirical analysis. the paper ends in section five with some policy recommendations and concluding remarks. 2. literature review 2.1 theoretical review theoretically, there is a divergence of opinions on the effect of exchange rate on foreign private investment inflow. the theoretical literature is examined here under the effect of exchange levels and exchange rate volatility. 2.1.1 effect of exchange rate level on foreign investment the effect of the exchange rate level on foreign investment has been examined by the wealth creation theory and the compa’s model. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 21 i. the wealth creation theory the wealth creation theory was advanced by froot and stein (1991). this approach claimed that depreciation (devaluation) of a host country’s exchange rate attracts foreign investment. this is based on the fact that a depreciation (devaluation) of a host country’s currency relative to the investors home country’s currency increases the relative wealth of the foreign investor. this increases the attractiveness of the host country to foreign investment as the foreign investors are able to acquire assets relatively cheaper in the host country. on the basis of this theory, a fall in the value of a country’s currency relative to the home country’s country currency of the investor, all things being equal will increase foreign investment in the host country, while an appreciation of the host country’s currency will reduce investment. ii. the compa’s model this model was advanced by compa (1993). the model states that a firm decision to invest in a foreign country depends on the expected future profitability of such a venture. in such a case, the more the exchange rate of the host country appreciates, the higher will be the expected future profit from investment in that country. therefore, the model predicts that an appreciation of the host country currency will lead to an increase in the inflow of foreign investment. this is contrary to the prediction of the wealth crease theory. 2.1.2 effect of exchange rate volatility on foreign investment there are two broad views on the link between exchange rate volatility and foreign investment. these are the real options approach and the risk aversion approach. i. the real option theory this approach was popularized by dixit and pindyck (1994). it considered the effect of exchange rate uncertainty on investment, particularly when such investment is irreversible. this theory states that under exchange rate uncertainty, a firm has an option to invest oversea or not. this is based on the fact that changes in the exchange rate affect the price of the options. another definition of the option is where a firm has plants in different countries which create the options to shift production among facilities in responds to exchange rate movement. this is called production flexibility. the theory, therefore, suggests that investment will change in favour of the lowest cost location after an exchange rate movement. this means that it is profitable for a multinational enterprise to open plants at home and abroad, postponing production decision until after an exchange rate shock. all things being equal, investing in a country with a high degree of exchange rate volatility will have a higher risk in terms of a stream of profit. hence, as long as the investment is partially irreversible, there are some benefits of holding back investment to acquire more information about the direction of the exchange rate movement. this theory, therefore, provides the argument of a negative effect of exchange rate uncertainty on foreign investment. ii. risk aversion theory this theory was popularized by goldberg and kolstad (1995). according to the theory, exchange rate volatility lead to a decrease in foreign direct investment. higher exchange rate volatility reduces the certainty equivalent expected exchange rate. certainty equivalent level is employed in the firm’s expected profit function to determine investment decision of today in order to realize a profit in a future period. since firms are more concerned about their future expected profits, they will postpone their investment decision as the exchange rate becomes more volatile. 2.2 empirical review there is a robust literature on the relationship between foreign capital inflow and exchange rate movement. however, there is no consensus among writers on the effect of exchange rate on foreign capital inflow. some studies found a positive impact, while others discovered a negative impact. eregha (2017) examined the impact of exchange rate polices and inflation expectations on foreign direct investment (fdi) flow in the west africa monetary zone (wamz) using annual time series data for the period 1980 – 2014. the arellano panel correction for serial correlation and heteroscedasticity option of within estimate for the selected wamz countries were employed. from the empirical results, exchange rate uncertainty was found to hinder foreign direct investment inflow. furthermore, the fixed exchange rate policy regime was found to adversely affect foreign direct investment inflow. on the other hand, the intermediate policy regime was found to have a positive impact on fdi inflow during the periods of the current account imbalance with changes in foreign exchange rate reserve as the channel. during this period, the study observed that the negative effect of the fixed exchange rate policy on fdi www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 22 increased. hence, the study concluded that fixed exchange rate regime is not a good policy in a period of current account imbalance. ali, mohammed and zahir (2017) examined the impact of exchange rate on foreign direct investment (fdi) in somalia using annual time series data for the period 1980 – 2010. the ordinary least square (ols) estimation technique was adopted by the study. from the empirical result, the exchange rate has a significant and negative impact on foreign direct investment in somalia. busse, hefeker, and nelgen (2010) examined the impact of exchange rate on fdi inflow in developed and developing countries for the period 1980 – 2014. the fixed effect model was specified for the study and estimated using the ordinary least square technique. the maximum likelihood estimator was also employed to check for the robustness of the estimates. from the empirical results, exchange rate levels were found to have a negative effect on fdi inflow in developing countries. in the developed countries, the exchange rate has a positive but insignificant effect on fdi inflow. the result from the study shows that a fixed exchange rate regimes have a positive and significant effect on fdi inflow in developed countries, while in the developing countries the impact was not statistically significant. abbott, cushman and vita (2012) employed generalized method of moment (gmm) to examine the effect of exchange rate policy on fdi inflow in seventy developing countries for the period 1985 – 2004. from the empirical results of their study, it was found that fixed and intermediate policy regimes positively influence fdi inflow as compared with the floating policy regime. russ (2012) examined the effect of exchange rate volatility on fdi inflow using a panel of twenty eight oecd countries for the period 1980 – 2005. a combination of ordinary least square (ols), generalized least square (gls) and generalizes method of moment (gmm) were employed in the study to estimate the specialized model. the result from the study revealed that the fixed exchange rate regime has a positive impact on fdi inflow. bilawal, ibrahim, abbas, shuaid, ahmed, hussain and fatima (2014) studied the impact of exchange rate on fdi in pakistan for the period 1982 – 2013. the study employed the ordinary least square regression method to estimate the specified model. from their results, the exchange rate has a direct and significant impact on fdi in pakistan. this implied that depreciation of the domestic currency encourages fdi inflow in pakistan. jaratin, mori, dullah, lim, and rozilee (2014) investigated the effect of exchange rate on fdi in selected asian countries for the period 1970 – 2011. the study covers the philippines, singapore, malaysia, and thailand. a combination of autoregressive distributed lagged (ardl) bounds test and ecm based autoregressive distributed lag approach for causality test was employed to ascertain the nature of the relationship between exchange rate and fdi. the empirical results from the study show that there exists a significant long term relationship between exchange rate and fdi in malaysia, singapore and philippines with a negative coefficient. this implies that appreciation of the countries’ currencies will lead to an increase in fdi inflow. the causality test result shows that there exists a bidirectional causality between exchange rate and fdi in philippines and singapore, while a long run unidirectional causality running from exchange rate to fdi exist for malaysia. choi, chung, and kim (2013) examined the impact of exchange rate volatility on fdi in korea using monthly data for the period 1990 – 2011. a combination of markov switching model estimation technique and multivariate garch-in-mean model and the impulse responds function were employed in studying the nature of the relationship between exchange rate volatility and capital inflow. from the empirical result, all kinds of capital inflows increase under low volatile exchange rate regimes. on the other hand, all capital inflow except fdi decreases under high volatile exchange rate regimes. the study thus concluded that medium level exchange rate volatility is most favorable for economic stability and growth. rashid and fazal (2010) examined the nature of the relationship between exchange rate volatility and capital inflow in pakistan using monthly data for the period 1990 – 2007. the linear and non-linear co-integration analysis was employed. from the empirical results, the causality runs from capital inflow to exchange rate. according to the results, monetary expansion emanating from capital inflow fuel exchange rate volatility. brozozoneski (2003) conducted a study on the impact of exchange rate risk on foreign direct investment using a panel of 32 countries. a combination of fixed effect ordinary least square, the generalized method of moment (gmm) and arellano-bond model was employed. the result of the estimation revealed that exchange rate volatility negatively affects foreign direct investment. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 23 studies based on nigeria include amasoma, nwosa and fasoranti (2015), nwosa and amassoma (2014), osinubi and amaghionyeodiwe (2009) and tokunbo and lioyd (2009). all the studies employed annual time series data and their results were mixed. nwosa and amassoma (2014) found that the exchange rate only affects fdi in the long run. their result suggested that an increase in the exchange rate will lead to a fall in fdi in the long run. this was corroborated by the findings of amasoma, nwosa, and fasoranti (2015). on the contrary results from the study of osinubi and amaghionyeodiwe (2009) revealed that an increase in the exchange rate will lead to an increase in the flow of fdi. tokunbo and lioyd (2009) concluded based on their results that the impact of exchange rate on fdi inflow is not statistically significant. a close observation shows that on both theoretical and empirical ground there is no consensus on the possible effect of the exchange rate on foreign private investment. while some found a positive relationship between both variables, others found a negative relationship, even a third variant concluded that there is no significant relationship between the exchange rate and foreign private investment. also, with the exception of choi, chung, and kim (2013) which employed monthly data in their study on korea and rashid and fazal (2010) which employed monthly data in their study on paskistan, other empirical studies employed the annual time series data. specifically, all the study in nigeria were based on annual time series data. the annual time series data is normally the annual average of the data which may smoothen the data thereby omitting some actual fluctuations which would have been captured by higher frequency data. finally, the majority of the studies captured foreign private investment using fdi. it is important to note that foreign private investment is made up of both fdi and foreign portfolio investment. each of this component of foreign investment may react differently to changes in the exchange rate. the non-inclusion of foreign portfolio investment in most of the studies amount to only telling a part of the story. 3. theoretical framework and model specification 3.1 theoretical framework the empirical model of this study is based on the portfolio balance framework developed by fernandez-arias & montiel ((1995) and popularized by taylor & sarno (1997) and moody, taylor & kim (2001). their framework is based on the fact that a foreign investor will exploit all the possibility of arbitrage across his home and host country. factors influencing capital flows can be grouped into domestic or pull factors and global or push factors. the pull factors represent a country’s specific investment risk and returns which attract foreign investors to invest in a country. on the other hand, the push factors represent external factors which push investment towards the host country. the pull or domestic factors can further be categorized into those which operates at the country level and those that operate at the project or asset level. assuming capital inflows are represented by transactions in different types of assets in the host country, the expected returns on investment can be said to be a function of the domestic business environment (dbe). therefore, for a foreign investor to consider investing in a country, he will consider the domestic business environment of the host country (dbe), the credit worthiness of the country (credit) and the financial and economic opportunities in his own (source) country (feo). from the group of factors, domestic business environment (dbe) and credit worthiness of the host country (credit) represent the pull factors, while the financial and economic opportunities (feo) in the source country represent the push factors. the above can be captured in the following equation: fi = fi (dbe, credit, feo) 1 where: fi = foreign investment. the domestic business environment (dbe) can be influenced according to fernandze-arias & montiel (1996) by numerous factors. this include among others exchange rate, exchange rate volatility, interest rate, inflation rate, foreign investment policy, cost of doing business, institutional factors, output growth rate and macroeconomic policy. the link between the exchange rate and foreign capital inflow can be seen from the argument advanced by froot and stein (1991). using the imperfect capital market framework, they argued that the exchange rate operates on foreign private capital inflow through the wealth effect. as the host country currency depreciates, it automatically increases www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 24 the wealth of foreigners, allowing them to make higher bids for domestic assets in the host country. in this case, host country currency depreciation stimulates inflow of foreign private capital. however, there may be an exchange rate risk associated with the timing between investment and profit. if the exchange rate depreciates to a lower level to source country currency at the time of profit repatriation relative time of investment, it will lower the return of the foreign investor. this exchange rate risk is a factor in the cost of investment. firms will invest abroad when the expected returns equal the cost of operation and payment for the degree of risk introduced by exchange rate volatility. the greater the exchange rate volatility, the higher the exchange rate risk. hence, exchange rate volatility has an inverse relationship with foreign private capital inflow. 3.2 model specification on the basis of the theoretical framework above, foreign private capital inflow is a function of the exchange rate, exchange rate volatility, and other control variables. this can be specified as fpci = fpci (exch, exchv, z) 2 where: fpci = foreign private capital inflow exch = exchange rate exchv = exchange rate volatility z = other control variables affecting foreign private capital inflow this can be specified explicitly in econometric form as fpcit = β0 + β1excht + β2 exchvt + η1zt + ut 3 in order to examine the effect of exchange rate on each component of foreign private capital inflow, the foreign private capital inflow is disaggregated into foreign direct investment (fdi) and foreign portfolio investment. therefore, the disaggregate model is as follows: fdit = α0 + α1excht + α2exchvt + η1zt + ut 4 where: fdi = foreign direct investment fpi = ф0 + ф1excht + ф2exchvt + η1zt + ut 5 where: fpi = foreign portfolio investment in the above models, the z is a vector of control variables that influence the dependent variable. the selected variables here include interest rate (int), real gross domestic product (rgdp), inflation rate (inf), financial development (fd) and degree of openness (open). these variables were selected based on their popular usage in economic literature. (for example, eregha, 2017; alobari, paago, igbara, felix & emmah, 2016; bilawal, ibrahim, abbas, shuaib, ahmed, hussain & fatima, 2014; osinubi & amaghionyeodiwe, 2009). the above model is converted into a var model as follows fpcit = β0 + β1 ∑ fpci t − nk n=1 + β2 ∑ exch t − nk n=1 + β3 ∑ exchv t − nk n=1 + β4 ∑ intt − nk n=1 β5∑ rgdpt − nk n=1 +β6 ∑ inft − nk n=1 + β7∑ opent − nk n=1 + β8∑ fdt − nk n=1 + ut (6) fdit = β0 +β1 ∑ fdi t − nk n=1 +β2∑ fpit − nk n=1 + β3 ∑ exch t − nk n=1 + β4 ∑ exchv t − nk n=1 + β5 ∑ intt − nk n=1 + β6∑ rgdpt − nk n=1 +β7 ∑ inft − nk n=1 + β8∑ opent − nk n=1 + β9∑ fdt − nk n=1 + ut (7) www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 25 fpit = β0 +β1 ∑ fpi t − nk n=1 +β2∑ fdit − nk n=1 + β3 ∑ exch t − nk n=1 + β4 ∑ exchv t − nk n=1 + β5 ∑ intt − nk n=1 + β6∑ rgdpt − nk n=1 +β7 ∑ inft − nk n=1 + β8∑ opent − nk n=1 + β9∑ fdt − nk n=1 + ut (8) the description of variable and their sign expectations are contained in the table 1 below: table 1: description of selected variables variables description measurement sign expectation fpci foreign private capital inflow fdi foreign direct investment fpi foreign portfolio investment exch exchange rate naira to one us dollar( n / us$1) + exchv exchange rate volatility mean deviation of the exchange rate int interest rate prime rate + rgdp real gdp gdp at constant market price + inf inflation rate 12 months moving average inflation. (to control to the level of economic stability of the economy) fd financial development the ratio of money supply to gdp (m2/gdp)( to control for financial sector development) + open degree of openness the ratio of total trade to gdp ( import+export gdp ) (a proxy for trade policy) + the causal relationship between the dependent variables and the explanatory variables will be examined using the vector autoregressive modeling technique. this will allow the study to be able to ascertain the direction of causality between all the variables in the model. 4. empirical analysis the econometric analysis begins with the test of the time series properties of the variables. this involves the unit root test and the co-integration test. this is aimed at establishing whether or not the time series is stationary. this is followed by the estimation of the specified model and then the test of the hypothesis. 4.1 unit root test the unit root test is based on the augmented dickey fuller (adf) statistics. the result is presented in the table below: table 2: unit root test of variables unit root test for variables in levels unit root test for variables in first order difference variables computed adf critical adf at 5% remark variables computed adf critical adf at 5% remark fpci -2.1419 -2.9369 non-stationary d(fpci) -11.4492 -2.9369 stationary www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 26 fdi fpi exch exchv int rgdp fd inf open -4.2671 -1.8564 1.5986 1.9035 -1.2657 -1.8348 -2.3420 -3.0382 -2.4246 -2.9350 -2.9369 -2.9458 -2.9369 -2.9369 -2.9434 -2.9540 -2.9458 -2.9350 stationary non-stationary non-stationary non-stationary non-stationary non-stationary non-stationary stationary non-stationary d(fpi) d(exch) d(exchv) d(int) d(rgdp) d(fd) d(open) -7.6640 -3.7869 -5.9144 -5.3269 -3.0045 -2.9625 -7.0696 2.9389 -2.9458 -2.9369 -2.9369 -2.9434 -2.9540 -2.9389 stationary stationary stationary stationary stationary stationary stationary from the table 5 above, only fdi and inflation rate were stationary in levels. hence, these two variables can be said to be integrated of order one. the other variables were stationary in their first order difference, hence they are said to be integrated of order one. 4.2 co-integration test the unit root test shows that most of the variable are non-stationary. regressing non-stationary variables on each other may lead to spurious regression. therefore, it is important to ascertain if there exists a long run or equilibrium relationship between the variables. if there is a long run or equilibrium relationship between the variables then it means that although the variables are non-stationary, their linear combination is stationary, hence they drift together over time. this can be established by conducting a co-integration test. the johansen co-integration test is employed to ascertain the existence of a long run or equilibrium relationship between the variables. the johansen co-integration test is based on trace statistics and maximum eigenvalue statistics at a 5% significance level. the results are presented in the tables below table 3: johansen co-integration rank test based on trace statistics hypothesized no. of co-integrated equations eigenvalue trace statistics 0.05 critical value probability none * at most 1* at most 2 at most 3 at most 4 at most 5 at most 6 at most 7 0.8693 0.6494 0.4878 0.4159 0.2785 0.2359 0.2191 0.0296 206.5283 125.1318 83.2009 56.4338 34.9261 21.8639 11.0992 1.2049 159.5297 125.0154 95.7536 69.8188 47.8561 29.7970 15.4947 3.8414 0.0000 0.0434 0.2658 0.3607 0.4519 0.3061 0.2055 0.2723 trace test indicates 2 co-integrating equations at 0.05 level table 4: johansen co-integration rank test based on maximum eigenvalue statistics hypothesized no. of co-integrated equations eigenvalue max-eigen statistics 0.05 critical value probability none * at most 1* at most 2 at most 3 at most 4 at most 5 at most 6 at most 7 0.8693 0.6494 0.4878 0.4159 0.2785 0.2359 0.2191 0.0296 81.3964 41.9308 26.7670 21,5076 13.0622 10.7646 9.8942 1.2049 52.3626 40.2314 40.0775 33.8768 27.5843 21.1316 14.2646 3.8414 0.0000 0.0346 0.6494 0.6456 0.8815 0.6708 0.2190 0.2723 maximum eigenvalue test indicates 2 co-integrating equations at 0.05 level from the results in tables 7 and table 8 above, both the trace test and the maximum eigenvalue test indicates the existence of two co-integrating equations at a 5% significance level. this is a clear indication that the variables are www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 27 co-integrated. hence there exist a long run or equilibrium relationship between the variables. on this basis, it can be concluded that although the variables are stationary on an individual basis, a linear combination of the variables is stationary. therefore regressing the variables on each other will not produce a spurious regression. 4.3 selection of lag length in order to estimate the var model, there is the need to ascertain the var lag length. in this study, the lag length selection is based on five criteria. these include sequentially modified lr test statistics, final prediction error (fpe), akaike information criterion (aic), schwarz information criterion (sc) and hannan-quinn information criterion (hq). the result of the various test is presented in the table below: table 5: var lag order selection criteria lag logl lr fpe aic sc hq 0 1 2 3 -1771.771 -1541.135 -1430.173 -1312.304 na 354.8256 125.1881 84.6234* 6.00e+29 1.25e+26 1.73e+25 4.44e.24* 91.2703 82.7248 80.3165 77.5540* 91.6115 85.7960* 86.1176 86.0851 91.39.27 83.8267 82.3979 80.6149* *indicates lag order selected by the criterion from table 9 above, four out of the five criteria selected lag order of three while one criterion selected one lag length. specifically, sequentially modified lr test statistics, final prediction error (fpe), akaike information criterion (aic) and hannan-quinn information criterion (hq) selected lag order of three, while schwarz information criterion (sc) selected one lag order. therefore, this study in the estimation of the var model adopted the lag order of three. 4.4 vector autoregressive estimates the estimation of the vector autoregressive model was conducted in three stages. the first stage is the estimation of the aggregate foreign private investment inflow model. this is followed by the disaggregate model comprising of foreign direct investment and foreign portfolio investment. i. estimates of the aggregate foreign private investment model the result of the estimation of the vector autoregressive model for the foreign private investment is presented in the table below: table 6: estimates of aggregate foreign private investment model regressors fpci exch exchv int rgdp inf open fd fpci(-1) fpci(-2) fpci(-3) exch(-1) exch(-2) exch(-3) exchv(1) exchv(2) exchv(0.136* (6.831) 0.066** (1.857) 0.417** (1.963) -0.255** (-2.382) -0.184** (-2.022) -0.351 (-0.227) -1.712** (-2.381) -1.905* (-6.638) -2.347* (-8.594) 1.203 1.168** (1.894) 7.359 (0.898) -4.426 (-0.057) 1.032** (2.191) 0.996* (15.575) 0.058* (4.017) -0.005*** (-1.460) 0.006 (0.997) 0.004 (0.652) 3.852 1.090 (1.029) 7.030 (0.501) 2.660 (0.202) 9.136** (2.247) -3.043* (-2.779) 3.968 (0.659) 0.629* (3.322) 1.109* (3.489) 1.168 (1.098) 6.014 8.323** (1.730) -5.925 (-0.092) -6.720 (-1.119) 0.046 (1.269) -0.048 (-0.963) 0.027 (0.991) -0.0004 (-1.585) 0.0008*** (1.655) 3.400 (0.070) 0.891* 0.090* (8.657) 9.960* (4.978) 0.500* (4.976) -1.608 (-0.517) 7.639 (0.181) 1.113 (0.480) -2.716** (-2.122) -5.701 (-0.132) .7.717** (-1.882) 1.626 -5.350 (-0.506) -4.650 (-0.331) 3.310 (0.251) -0.023*** (-1.395) -0.008 (-0.385) 0.028** (2.341) 1.700 (0.123) 0.0002 (0.915) 0.0003*** (-1.382) -5.350 (0.506) -4.650 (-0.331) 3.310 (0.251) -0.0004 (-0.568) 7.370 (0.0006) 7.810 (0.129) 7.170 (0.106) 6.390 (0.571) -5.790 (-0.544) 0.008** 6.950* (2.752) 7.340** (2.190) 6.210 (0.197) -0.004** (-2.224) -7.550 (-0.028) 0.0009 (0.668) 2.150*** (1.342) -1.130 (-0.424) -1.640 (-0.645) 0.014 www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 28 3) int(-1) int(-2) int(-3) rgdp(-1) rgdp(-2) rgdp(-3) inf(-1) inf(-2) inf(-3) open(-1) open(-2) open(-3) fd(-1) fd(-2) fd(-3) c (0.835) -0.269 (-0.121) 0.179 (0.297) 0.164** (1.945) 0.833* (4.654) 0.298** (1.854) -0.528 (-0.171) -3.708** (2.342) -2.129 (-0.748) 6.924* (2.568) 2.038** (1.849) 5.177 (0.767) 7.818* (3.055) 1.812 (0.587) 6.032** (1.764) 5.373 (0.261) (1.175) -3.609 (-0.715) -1.291 (-0.352) -2.762** (-2.041) -1.123** (-2.377) 2.552 (0.069) 9.755 (1.392)** * -12.533 (-1.201) 5.239 (0.809) -184.090 (-1.051) 74.990 (0.502) -154.359 (-1.005) -27.103* (-3.296) -56.827* (-2.809) 21.204 (0.272) -1.096 (-0.301) (1.072) -6.917* (3.428) -17.132 (-0.027) 0.0001 (0.168) -0.0001 (-0.226) -0.001 (-0.260) 1.962** (1.925) -2.021 (-1.132) 9.540 (0.860) -3.054* (-2.550) -2.513* (-9.853) 3.697*** (-1.407) -3.036 (-0.304) -1.189 (-0.989) -3.442* (-2.521) -2.760 (-0.345) (3.489) -0.109 (-0.278) -0.067 (-0.236) 5.670 (0.205) 1.220 (0.038) 1.420 (0.496) -0.125** (-2.230) -0.219 (-0.270) 0.326 (0.646) 18.563*** (-1.359) 27.648** (2.374) 0.654 (0.054) 3.374 (0.743) -6.089 (-1.112) -2.471 (-0.407) -1.096 (-0.301) (0.075) -5.111 (-0.153) 16.235 (0.671) 0.967* (4.153) 0.384** (2.278) 0.639* (2.647) -3.783** (-2.306) -2.158** (-2.001) -1.444* (-5.352) 3.374* (2.615) 7.382** (1.918) 7.973* (7.321) 1.169* (2.667) 3.379 (0.729) 1.132** (2.208) -2.638 (-0.085) 0.326* (2.831) -0.223 (-1.263) 0.139 (1.086) -1.260 (-0.101) 7.400 (0.051) -1.560 (-1.207) 1.360* (5.526) -0.383 (-1.045) -0.198 (-0.872) 9.249*** (1.502) 2.437 (0.464) -9.543*** (-1.769) 3.217*** (1.572) 2.313 (0.937) 2.768 (1.012) -2.959** (-1.803) * (1.594) -0.006 (-0.756) -0.003 (-0.587) 7.170 (1.184) -4.290 (-0.614) -3.730 (-0.594) -0.014 (-1.202) 0.025** * (1.452) -0.006 (-0.608) 0.305* (2.774) 0.181* (3.250) 0.042 (0.159) 0.135** * (1.361) -0.067 (-0.560) -0.066 (-0.502) 0.120** * (1.505) (1.066) -0.019 (-0.923) 0.020 (1.399) 4.120* (2.851) 1.530 (0.917) -1.880 (-1.252) -0.032 (-1.118) 0.087** (2.054) -0.054** (-2.068) 0.910 (1.270) -0.112 (-0.184) -1.139** (-1.815) 0.605* (2.542) 0.039 (0.137) -0.085 (-0.268) 0.324** (1.699) r-squared f-statistics 0.753 5.780 0.979 27.382 0.926 7.301 0.964 15.724 0.969 18.433 0.994 99.585 0.876 4.133 0.848 3.278 *significant at 1% ** significant at 5% *** significant at 10% colum two of the above table shows the estimates of the foreign private capital inflow equation. from the result, all sign expectations were met and the test statistics show good performance. from the result, the lagged values of the foreign private capital inflow have a significant impact on its current period value. with the positive sign of the lagged period values, an increase in the previous level of foreign private capital inflow will lead to an increase in its current period value. this was statistically significant at 1% judging by the values of the t-ratios. the exchange rate has a negative sign and the impact on foreign private capital inflow was statistically significant in the first and second lagged periods. however, the impact was not significant in the third lagged period. with the negative sign, an increase in the exchange rate (devaluation/ depreciation of the naira) will lead to a fall in foreign private capital inflow. exchange rate volatility variable was statistically significant in the first, second and third lagged periods and the coefficients have negative signs. hence, the increase in exchange rate volatility leads to a fall in foreign private capital inflow. ii. estimates of the disaggregate foreign private investment model the result of the estimation of the vector autoregressive model for the disaggregated foreign private investment is presented in the table below: www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 29 table 7: estimates of disaggregate foreign private investment model variables fdi fpi exch exchv int rgdp inf open fd fdi(-1) fdi(-2) fdi(-3) fpi(-1) fpi(-2) fpi(-3) exch(-1) exch(-2) exch(-3) exchv(1) exchv(2) exchv(3) int(-1) int(-2) int(-3) rgdp(-1) rgdp(-2) rgdp(-3) inf(-1) inf(-2) inf(-3) open(-1) open(-2) open(-3) fd(-1) 0.938* (2.877) 0.230** (1.932) 0.076** (1.964) 0.133** (1.672) 0.015*** (0.136) 0.055 (0.604) -1.339** (-1.899) -1.585** (-2.252) -2.721 (-0.618) -2.315** (-2.274) -1.256** (-2.022) -3.315** (-2.147) -1.008** (2.044) 1.210*** (-1.548) -2.319 (0.410) 1.065** (2.125) 1.263** (2.341) 16.488 (0.337) -1.601** (-1.845) -3.201** (-2.378) -2.560* (-2.785) 6.350* (2.600) 4.130** (2.173) 6.160* (3.080) 8.010** (1.971) 1.110 (1.105) 0.501 (0.465) 1.605** (1.678) 0.800 (0.867) 0.410*** (1.554) 0.350** (1.930) 0.707** (2.314) -2.121** (-2.098) -2.761* (-2.512) -6.645* (-4.430) -1.336* (-13.204) -3.217* (-8.543) -1.178* (-39.863) -7.002 (-0.431) 3.080 (1.185) -8.950 (-0.478) 6.180* (3.730) 8.120* (4.552) 1.897** (1.869) -1.070* (-11.888) -4.100* (-2.926) -2.150** (-2.085) 7.001** (2.000) 5.790* (2.412) 1.001*** (1.546) 3.061** (1.800) 3.600* (2.769) 8.111** -1.380* (-4.649) -3.480* (-2.608) -5.951* (-2.501) -4.031* (-7.309) -5.770 (-0.054) -.5.059* (-8.409) 1.231** (2.291) -0.683 (-0.822) 0.251 (0.625) -0.007*** (-1.646) 0.013*** (1.467) -0.001 (-0.235) 7.878** (1.755) 11.121*** (1.551) 3.338 (0.646) 9.318* (4.606) 8.167* (4.906) 3.780* (4.506) 9.421* (7.907) 11.844* (12.285) 4.902* (8.392) 4.080** (2.372) 5.360 (0.030) 2.655*** (1.487) -3.738 (-0.049) -1.064* (-9.133) -3.680 (-0.681) 2.730 (0.005) -8.510 (-0.184) 1.680 (1.268) 7.080 (0.370) 9.730 (0.063) 1.242** (1.974) 6.847*** (1.454) 4.001 (0.548) -0.970 (-1.130) 1.845 (1.090) 1.203 (0.812) 1.102*** (1.355) -1.380 (-1.061) 2.466 (0.263) 0.003 (0.417) -0.005 (-0.655) -1.610 (-0.019) 1.173 (0.818) -1.171 (-0.525) 1.896 (0.124) 2.466 (0.573) 3.108 (0.970) 5.014*** (-1.548) 8.400 (0.061) -6.990 (-0.331) 2.714*** (1.446) -1.400 (-0.776) 1.270** (2.454) -7.650 (-1.024) -1.150** (-1.916) 0.068** (1.810) -0.110** (-1.880) 0.047*** (1.661) -0.007** (-2.139) 0.001* (2.456) -0.005 (-1.000) 1.319* (4.152) -0.901** (-1.777) 0.422 (1.155) 1.730 (0.053) -1.950 (-0.558) 5.080*** (1.609) -0.186 (-0.333) -0.103 (-0.118) 0.259 (0.436) -3.122 (-0.185) 2.094*** (1.674) -1.096 (-0.867) 0.381 (0.071) -1.141** (-1.764) 7.215 0.009* (2.534) 0.001** (1.850) 0.003** (2.223) 5.570** (2.131) 0.001 (0.179) 3.510** (1.971) 1.006 (0.321) -2.275 (-0.472) 1.181 (0.507) -6.541** (-2.023) 5.866 (1.085) -5.839** (-1.934) 8.210 (0.315) -1.166 (-0.281) 2.795 (0.934) 0.087 (0.331) -0.387 (-1.359) 0.602* (2.330) -8.455** (-1.846) 9.772*** (1.373) 6.424*** (-1.321) 8.093 (0.589) 2.632 (0.257) 1.021** (1.987) 2.497 (0.572) 2.316 (0.437) -9.980 (-0.913) -5.280 (-0.544) 9.830 (1.051) 4.380*** (-1.631) -6.600** (-1.704) 5.891 (0.190) 0.027*** (1.390) 4.140** (2.001) 0.026** (1.816) 6.450 (0.371) 0.001 (0.305) -0.002 (-0.996) 0.363** (2.207) -0.263 (-1.002) 0.106 (0.559) 6.750 (0.401) -5.750 (-0.317) -1.490 (-0.909) 1.447* (4.987) -0.479 (-1.062) -0.178 (-0.579) 1.174*** (1.349) 0.923 (0.142) -1.182** (-1.804) 3.057 (1.107) 1.209 -4.871 (-1.150) 4.911*** (-1.307) 9.361* (2.585) -1.341 (-0.129) 1.721 (1.148) 8.401 (0.699) 0.001*** (-1.450) 0.001*** (1.589) -0.005 (-0.955) 7.760 (1.154) -1.500 (-1.129) 7.830 (0.674) 0.006 (1.063) 0.001 (0.186) -0.015 (-2.108) 1.720* (2.640) -8.890 (-1.270) 9.900*** (-1.561) -0.007 (-0.690) 0.020 (1.167) -0.008 (-0.732) 0.400 (1.187) -0.138 (-0.553) -0.013 (-0.054) 0.211** (1.976) 3.701 (0.336) -3.931 (-0.402) 1.941** (2.060) -7.801* (-2.899) 5.611*** (-1.442) 9.411 (0.302) -0.006* (-3.190) 0.003 (1.032) 0.004 (0.299) 4.300* (2.466) -6.060** (-1.761) -1.210 (-0.400) -0.008 (-0.052) 0.005 (0.201) 0.002 (0.116) 4.580* (2.712) 2.160 (1.190) 2.590*** (-1.573) -0.003 (-0.137) 0.041 (0.911) -0.024 (-0.776) 0.208 (0.237) -0.511 (-0.784) 0.946*** (-1.437) 0.467** (1.684) www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 30 fd(-2) fd(-3) c 1.500** (2.139) 9.950** (1.824) (2.211) -0.998 (-0.554) 1.126 (1.111) -7.464 (-0.149)_ 2.172*** (-1.311) 4.172 (0.226) -2.050 (-0.227) (1.005) -0.968 (-0.274) 1.318** (2.244) -1.571 (-0.545) (0.360) 2.739 (0.736) 2.390*** (-1.308) -0.124 (-0.962) 0.223*** (-1.551) 0.175* (2.485) 0.251 (0.747) -0.437 (-1.170) 0.390** (2.126) r-squared fstatistics 0.865 2.615 0.855 2.417 0.982 23.497 0.932 5.595 0.975 16.499 0.980 20.667 0.994 78.151 0.930 5.454 0.899 3.654 from the results in table 11 above, column 2 shows estimates of fdi equation. form the result, the sign expectations were met for all the variables except for interest rate and exchange rate. also, all the test statistics show good performance. the coefficient of the determination was 0.86. this means that about 86% of the systematic variation in fdi was explained by the model. the f-statistics has a coefficient of 2.615. this was significant at the 5% level. this shows that the group of the selected explanatory variable are significant determinants of fdi inflow. the significance of individual variables was tested using the t-statistics. from the estimates, previous levels of fdi has a positive and significant impact on the current level of fdi inflow. the impact was significant at the 1% level in the first lagged period, while the second and third lagged period were significant at the 5% level. this shows that the higher the previous value of fdi inflow, the more the fdi inflow in the current period. the exchange rate has a negative sign. the impact of exchange rate on fdi was significant for all the lagged periods at 5% level. this shows that an increase in the exchange rate (devaluation/depreciation of the naira) will lead to a fall in fdi inflow. similarly, exchange rate volatility also has a negative sign in the three lagged periods. the impact was also significant at 5% in all the lagged periods. this shows that high volatility of the exchange rate leads to a fall in fdi inflow. also, in the foreign portfolio investment equation, the exchange rate has negative signs in all the lagged periods. also, the impact of exchange rate on fpi was significant 5% in lagged period one but in lagged period two and three the impact was significant at 1% level. this shows that an increase in the value of the exchange rate (devaluation of the naira) will lead to a fall in fpi inflow. closely related is the change rate volatility. exchange rate volatility has a negative sign in as all the lagged periods and its impact on fpi inflow was highly significant even at 1% level. this shows that volatility in exchange leads to a fall in fpi inflow into nigeria. on the whole, findings from the estimation of the specified models can be summarized as follows: i. devaluation of the naira has a negative impact on foreign private capital (both foreign direct investment and foreign portfolio investment) inflow in nigeria. ii. the volatility of the exchange rate of the naira reduces foreign private capital inflow in nigeria. hence, a stable exchange rate promotes foreign private capital inflow. iii. increase in the size of the domestic market promotes foreign private capital inflow in nigeria. the bigger the size of the economy the more attractive it is to foreign investors. iv. increase in the rate of inflation discourages foreign private capital inflow in nigeria. v. development of the financial sector is a significant factor in promoting foreign private capital inflow in nigeria. vi. increase in the size of the domestic market stimulates the appreciation of the domestic currency of a country. this means the sustained growth of the nigerian economy can lead to an appreciation of the naira. vii. increase in the level of financial development will lead to a fall in the exchange rate. this means that an improvement in the operations of the financial sector of the economy will lead to an appreciation of the naira. 5. policy recommendations on the basis of the above findings, the followings are possible recommendations. www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 2, no. 2; 2018 31 i. the government through the central bank should put in place policies to stabilize the exchange rate of the naira. this can be done through regular central bank intervention foreign exchange market. a more stable exchange rate will promote foreign capital inflow into the economy. ii. an appropriate macroeconomic policy framework should be put in place to boost the size of the domestic market. an increase in the real gross domestic product (gdp) will stimulate foreign capital inflow into the economy. increase in the size of the domestic economy will also empower the naira to appreciate. iii. the government through the central bank should employ appropriate macroeconomic policies to control the inflationary pressure in the economy. the current 15% inflation rate is on the high side. as the empirical result from this study revealed, increasing rate of inflation discourage foreign capital inflow and also adversely affect the exchange rate of the naira. iv. a sound financial sector is a basic pre-requisite for assessing the absorptive capacity of the domestic economy to the inflow of foreign capital. therefore, the nigerian government through the various financial sector regulatory agencies should step up their supervisory role in the sector in order to boost the soundness of the financial sector of the economy. 6. conclusion foreign private capital inflow is a significant determinant of economic growth in nigeria. in attempting to stimulate economic growth which is a key macroeconomic goal of the nigerian state, the economy must be made attractive for foreign capital inflow. from the empirical results, the stable exchange rate is a key determinant of foreign private capital inflow in nigeria. therefore, an appropriate exchange rate policy aimed at stabilizing the exchange rate of the naira is needed. in order to achieve this, the recommendations above would be helpful. references ali y. s, mohammed i.i & zahir m.o (2017) impact of changes in the exchange rate on foreign direct investment: evidence from somalia. journal of ecowas and sustainable development, 8(8) 27 – 54 alobari c, paago j, igbare f.n, & emmah d (2016) exchange rate and foreign direct investment exchange rate and foreign direct investment. implication for economic growth in nigeria. equatorial journal of finance and management science, 1(1)10 – 23 amasoma i. o., nwosa i. k, & fasoranti k. o (2015). capital flowsgrowth nexus in nigeria: has foreign direct investment played a role in accelerating economic growth? journal of sustainable development in africa , 34-54. bailey, j.m. & tavlas, s.g. 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2022 issn 2576-1161 e-issn 2576-1188 published by cribfb, usa 1 gender diversity on board and its relevance to firm performance: a study on pharmaceutical industry of bangladesh hossain ahmmed fahad post-graduate faculty of business studies university of dhaka, dhaka, bangladesh e-mail: fahadhossain.frg@gmail.com https://orcid.org/0000-0002-1004-8660 imran mahmud post-graduate faculty of business studies university of dhaka, dhaka, bangladesh e-mail: imran.mahmud.du@gmail.com https://orcid.org/0000-0002-9255-462x atkia nabiha rahman post-graduate faculty of business studies university of dhaka, dhaka, bangladesh e-mail: a.nabiharahman@gmail.com https://orcid.org/0000-0002-9961-164x received: september 23, 2021 accepted: november 12, 2021 online published: january 01, 2022 doi: 10.46281/asfbr.v6i1.1520 url: https://doi.org/10.46281/asfbr.v6i1.1520 abstract the study tries to examine the relationship between gender diversity on the board and firms' profitability in bangladesh's pharmaceutical industry. the study employs a panel data approach with all the pharmaceutical companies listed under dhaka stock exchanges. the sample period covers eight years from 2012-2019. to conduct the study, return on equity and tobin's q was taken as a proxy of accounting measure of profitability and market measure of profitability, respectively. the proportion of women on board structure was taken as a proxy for gender diversity. some other variables: board size, firm age, leverage, and firm size, were incorporated to control the effect of these variables on profitability. the study reveals that gender diversity shows a positive but insignificant relationship with the firm's performance in terms of roe. the r square of this model was 11.67%. in terms of tobin's q, gender diversity exhibited a significant positive relationship with firm performance. the r square of this model was 17%. this implies https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 6, no. 1; 2022 2 that the market ascribes a great value to the inclusion of women in board structure since it increases the board structure's independence and profitability. keywords: gender diversity, profitability, board, pharmaceutical sector, bangladesh. jel classification codes: c12, f65, l25. introduction bangladesh is among the few countries in south asia that have increased women's employment and cut the wage gap between men and women in the past decade. but women still have limited choices, decision-making power in the jobs and economic environment. the board of directors is the internal mechanism of a company. increased involvement of women on board is said to increase transparency, accountability in the company. women on board can mitigate fraudulent activities and ensure the protection of investors' capital. so, women on board may improve the financial health of a company. many companies failed in the past two decades due to a lack of good governance, poor accountability, earnings management, asset revaluation, and the use of creative accounting, etc. the company's board of directors is responsible for setting up strategic plans that outline the corporation's growth path and sustainability. hence, it is essential to investigate the board characteristic and diversity as these can significantly influence the company's performance. various empirical studies have been conducted worldwide, but the studies conducted in bangladesh regarding this are pretty minimal if compared. a similar study was conducted on dselisted seven pharmaceutical companies in bangladesh using roe, roa, and navps to measure financial performance (islam, 2018). another study used 259 listed companies in bangladesh (munira, 2020). both found a positive association between women's representation in the boardroom and firm financial performance indicators. where one study focused on a few companies of pharmaceutical sectors of bangladesh, the other study looked into all the industries but for the years 2018 and 2019. these two studies do not provide a clear look at the actual state of a sector like pharmaceutical in terms of gender diversity. this report studied the effects of gender diversity in the board of directors on the profitability of the pharmaceutical industry in bangladesh. firm size, firm age, board size, debtasset ratio, and gender diversity on board were considered independent variables. roa and tobin's q as the dependent variable. literature review gender diversity on the board structure of companies began to beg the question of the interplay among the firm performance and women participation on the board. the presence of multiple schools of thought has shown varieties of supports regarding this argument. hambrick and mason (1984) have established a negative relationship between firm performance and women's participation. the contrary has also been found. diversity has been viewed under agency theory as a measure of independence and a source of fair and transparent decision-making (jensen & meckling, 1976; luoma & goodstein,1999). some have found proof of a lower degree of fraudulent activities for increased participation of women in corporate board structure. however, the degree to which increased participation of women will contribute to good corporate governance lies in what goal corporate governance should try to achieve. brown et al. (2002) contemplated that women's participation would not https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 6, no. 1; 2022 3 contribute to the enhanced value of a firm if the existence of corporate governance does not promote performance improvement of the firm. as good corporate governance and an increase in women's participation on board is essential for enhanced performance for a company, many countries have made it a compulsory requirement for the board to have a high percentage of women composition. norwegian companies were required to have 40% of their board members be represented by women (huse, 2007). previous literature has shown that female participation on board increase firm performance. a positive impact on firm performance was found for fortune 500 companies that incorporated at least three women on board structures from 2004-2008. (joy et al., 2008). msci world index reported that companies under the strong leadership of women had higher annual financial returns (11.1% versus 7.4%) and price-to-book ratios (1.76 versus 1.56) compared to companies with no such leadership of women (lee et al., 2015). with the introduction of control variables in this trajectory, somewhat ambiguous results have been found underlying the actual link between gender diversity and firm performance. adams and ferreira (2009) found that gender diversity among board members could produce poor firm performance. this result was inconsistent with previous literature. another study on nigerian firms with 122 samples and for the period 1991-2008 found a negative relationship between gender diversity and firm performance (ujunwa, 2012). a 2014 study in the economic journal found no evidence to support the link between gender diversity in companies in the u.k. and corporate performance. the study concluded that gender diversity should be structured around the morals of variety. (gregory et al., 2014) but not all studies showed such results, even with the introduction of control variables. nguyen et al. (2015), using a sample of 120 publicly listed companies as the sample for 2008 to 2011, found a positive relation between board gender diversity and firm performance. this study also added that the inclusion of more women on the board increased firms' performances. moreover, using 638 american fortune 1000 companies as a sample, carter et al. (2003) found a significant positive correlation. in this study, company size, sector, and corporate governance characteristics were considered as control variables. a similar result was found in erhardt et al. (2003) study, which examined the return on investment of 127 large u.s. companies with their proportion of women and minorities involved on the board for 1993 and 1998. evidence of such a link between the increase in the presence of women on board and enhanced performance of firms was also found in romanian companies (ionascu et al., 2018). this study was conducted during 2012-2016 on the companies listed on bucharest stock exchange. in bangladesh, islam (2018) conducted a study on seven listed companies of the dhaka stock exchange under the pharmaceutical sector. the study concluded that the companies should include trained and mature women on board to increase shareholder value. further research was done considering 259 listed companies in dse for the years 2018 and 2019. this study also found a positive association. despite the result of these two studies being positive, the studies were not conclusive enough. research question is gender-diverse boards of directors relevant to the financial performance of pharmaceutical companies listed in dse? https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 6, no. 1; 2022 4 method sample selection the population for this study comprised all companies listed in the pharmaceutical sector of dse in the last eight years (2012–2019). the sample consists of companies, of which all the data for those years was available. thus, the number of companies came down from 31 to 27. all the relevant data were collected from secondary sources; these involve mainly the audited financial statements and the web portals of the selected companies. variables selection following some literature (vafaei et al., 2015; haslam et al., 2010; ionascu et al., 2018), marketbased and accounting-based variables have been selected to enhance the viability. for marketbased variables, tobin's q (sá et al., 2017) has been chosen, as it is expected to capture the current and future outlook of the company. return on asset has been selected as an accounting-based variable as it is told to state a company's present and recent past performance adequately. dependent variables return on asset (roa): roa is a better estimation of profitability considering financial leverage. (rezina et al, 2020; munira, 2020; ionascu et al, 2018) if a company can secure a higher roa, it is utilizing its asset more efficiently. roa is calculated as net income divided by total assets. tobin's q: tobin's q (sá et al., 2017) has been selected for the market-based variable. tobin's q equals the summation of market value of equity, total debt, and preferred share by total asset. it captures the current and future outlook of the company. independent variables diversity: the proportion of women on the board was used to measure diversity; this was selected as the primary independent variable, whose effect is the study's primary concern. it is calculated as the number of female board members divided by the number of total board members in a given year. (vafaei et al, 2015; haslam et al, 2010; ionascu et al, 2018). a study investigated 259 listed companies on dse and found a positive association between women's representation in the boardroom and firm financial performance indicators. (munira, 2020). meca et al. (2015) studied the link between boards' gender diversity and bank performance on a sample of 159 banks across nine countries for 2004–2010. the study showed that banks' performance is improved by gender diversity. another study found that gender diversity among board members could result in poor firm performance. (adams & ferreira, 2009) firm size: firm size has been calculated using the literature of asimakopoulus et al. (2009), nunes et al. (2009), pratheepan (2014), and nakatani (2019). they found firm's size has a positive influence on a firm's performance. it is calculated as the natural log of total asset. it is one of the control variables of the study. some researchers also found a negative relationship between a firm's size and firm's performance (goddard et al. 2005) firm age: firm age has been calculated following rezina et al. (2020). blažková and dvouletý (2019) found positive relationships between the firm's age and the firm's performance. on the other hand, some researchers found the relation was negative (coad et al., 2013). the calculation method is: natural log of firm age (difference between the year of incorporation and time t) board members: it is calculated as a natural log of board size. board members are expected to protect the interest of the investors via mediating any conflicts that arise. thus, https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 6, no. 1; 2022 5 enhancing the firm's performance. while agency theory and resource dependency theory suggest that the board size positively affects performance, stewardship theory favors smaller board size and argues that larger board size negatively impacts firm performance. a study was carried out for five years from 2008 to 2012 using 145 non-financial companies listed in the nse cnx 200 index of india, which found that board size and the firm performance had a positive relation. (kalsie & shrivastav, 2016). leverage: the leverage of the firm is measured as the debt-asset ratio. leverage and a firm's performance are negatively related. (asimakopoulus et al., 2009). most empirical studies have found an inverse leverage-profitability relationship. table 1. definition of variables used in study variable notation expected signs definition dependent variable return on asset roa the ratio of net income/total assets tobin's q tobin's q (market value of equity + total debt + preferred share)/total asset independent variable firm size firm size +/natural log of total asset firm age firm age +/natural log of firm age (difference between the year of incorporation and time t) board size board size +/natural log of board size diversity diversity +/the proportion of female members on board leverage debt to asset ratio interest bearing liability/total asset hypotheses taking the theoretical arguments into consideration, the following hypothesis is proposed:  h0: financial performance for pharmaceutical companies listed in dse has not influenced gender-diverse boards of directors.  h1: financial performance for pharmaceutical companies listed in dse has influenced gender-diverse boards of directors. model of the study to investigate whether diversity on board affects firm’s profitability, the model is used given below: roa =α + β1diversityit + β2firmsizeit + β3firmageit + β4boardsizeit + β5leverageit + εit tobin’s q =α + β1diversityit + β2firmsizeit + β3firmageit + β4boardsizeit + β5leverageit + εit https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 6, no. 1; 2022 6 where i = 1, 2, …. n and t = 1, 2, … t represent firm and a year respectively; β is the parameter, and ε represents the error term or disturbance empirical results descriptive statistics descriptive statistics of all variables have been presented in the following table. table 2. descriptive statistics of study variable obs mean std. dev. min max roa 216 0.0715 0.0972 -0.4971 0.4402 mkt to book 216 4.8542 12.8614 0.0000 166.4684 tobinsq 216 1.8747 1.9446 0.0015 13.4145 diversity 216 0. 2250 0.1810 0.0000 0. 5714 board size 216 1.9248 0.2551 1.3863 2.4849 firm size 216 21.8397 1.5146 18.2006 24.8986 firm age 216 3.2205 0.6691 0.6931 4.1744 debt asset ratio 216 0.2286 0.1947 0.0000 0.7034 source: author's calculation in the following table, the comparison of the means for companies with or without women on boards of directors is shown. based on the t-test results, it appears that there are no differences between the groups at 0.05 significant level. as all the values of the t-test stayed within the region on ±1.96, we could not state that there is any difference between the groups. table 3. comparison of the means average average companies with female members on board companies without female members on board t-test roa 0.0687 0.0780 -1.4335 tobin's q 2.1346 1.2574 -0.0001 mkt to book 6.1724 1.7235 0.00003 board size 1.9285 1.9158 0.0004 firm’s age 3.7480 3.7480 0.0000 firm size 21.8646 21.7805 -0.00004 debt to asset ratio 0.2322 0.2200 -0.0013 source: author's calculation https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 6, no. 1; 2022 7 multicollinearity test table 4. results of vif test vif 1/vif board size 1.15 0.8731 firm’s age 1.14 0.8759 debt to asset ratio 1.06 0.9411 diversity 1.04 0.9579 firm’s age 1.02 0.9775 mean vif 1.08 source: author's calculation here, none of the variables exceed 2.5. if any variables exceeded 2.5, a multicollinearity problem would have been spotted. multicollinearity problem disturbs the individual effects of the independent variable on the dependent variable. heteroscedasticity test model 1 shows no presence of heteroscedasticity, as prob>chi2 is higher than .05, but the problem of heteroscedasticity is present in model 2. this will need to be fixed. homoscedasticity is one of the assumptions of the ols (ordinary least square) model. table 5. results of heteroscedasticity test breusch pagan /cook-weisberg test for heteroscedasticity model chi2(1) prob>chi2 presence of heteroscedasticity model 1-roa 0.01 0.907 no model 2-tobin’s q 55.87 0.000*** yes note: * represents significance at 10% level, ** represents significance at 5% level and *** represents significance at 1% level. source: author's calculation autocorrelation test table 6. results of autocorrelation test wooldridge test for autocorrelation in panel data model f prob>f presence of autocorrelation model 1-roa 9.912 0.004 yes model 2-tobins q 7.485 0.011 yes note: * represents significance at 10% level, ** represents significance at 5% level and *** represents significance at 1% level. source: author's calculation the wooldridge test has been used in this study. the null hypothesis of the test states no autocorrelation. for both models, autocorrelation is present at a 0.05 significant level. the absence of autocorrelation is one of the assumptions of the ols model. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 6, no. 1; 2022 8 test for cross-sectional dependency this is a crucial test to determine whether a fixed-effect or random-effect model is enough to predict the relationship of variables or not. the null hypothesis is, there is no cross-sectional dependency among the panel. for model 2, the null hypothesis has been rejected at 0.10 significant level pesaran's value but can't be dismissed for friedman's value. thus, the average value of offdiagonal has been checked; it is higher than .25. so, there is the presence of cross-sectional dependency in this model. this needs to be considered while interpreting the data. the presence of cross-sectional dependence might lead to biased results from fixed effect or random effect model. panel corrected standard error (pcse) model should be used for a better result. table 7. results of test for cross sectional dependency model pesaran’s value p value friedman’s value p value avg. value of offdiagonal elements (abs) crosssectional dependency model 1roa -0.857 0.3917 4.074 1.0000 0.384 no model 2 – tobin’s q 2.609 0.0091 17.840 0.8815 0.511 yes source: author's calculation hausman test it is necessary to determine the model between the fixed and random effect models, which will better analyze the data. this is done via using stata/mp 13 software and conducting hausman test. in this test, the null hypothesis is random effect model is appropriate. table 8. results of hausman test model chi2(9) p value decision model 1-roa 10.04 0.0741* fixed effect model model 2-tobins q 8.30 0.1405 random effect model note: * represents significance at 10% level, ** represents significance at 5% level and *** represents significance at 1% level. source: author's calculation at model 1, p-value is lower than the 0.10 level of significance; for this null hypothesis is rejected, the fixed effect model is used to analyze data. at model 2, the p-value is higher than the 0.10 level of significance, for this null hypothesis is not rejected, and the random effect model is used for this model. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 6, no. 1; 2022 9 fixed effect model table 9. summary of fixed effect model for model 1 variables coef. t p>│ t│ significance diversity 0.0525 0.4400 0.6620 no board size 0.0044 0.1000 0.9190 no firm’s age 0.1816 2.1800 0.0300** at 0.05 debt to asset ratio -0.1291 -2.6700 0.0080*** at 0.01 firm size -0.0382 -3.0100 0.0030*** at 0.01 constant 0.2352 0.8600 0.3930 r-sq 0.1167 f 4.86 prob>f 0.0003 note: * represents significance at 10% level, ** represents significance at 5% level and *** represents significance at 1% level. (underline) represents wrong sign. source: author's calculation the table reflects the impact of the firm-specific accounting-based performance measure, roa. the r-square value is 11.67%, and p-value is less than 0.05. the model is somewhat acceptable. the model shows diversity even though having a positive coefficient is insignificant. among other variables, the firm's age is significant at 0.05, whereas, debt to asset ratio and firm size are significant at 0.01 level. even though firm size is significant, they are exhibiting the wrong sign. random effect model table 10. summary of random effect model for model 2 variables coef. z p>│ z│ significance diversity 1.7382 1.2800 0.2000 no board size 0.3516 0.5600 0.5750 no firm’s age 7.7580 6.0800 0.0000*** at 0.01 debt to asset ratio -0.7871 -1.1000 0.2700 no firm size -0.4184 -2.6800 0.0070*** at 0.01 constant 0.2352 0.8600 0.3930 r-sq 0.1879 chi2 42.98 prob>chi2 0.0000 note: * represents significance at 10% level, ** represents significance at 5% level and *** represents significance at 1% level. (underline) represents wrong sign. source: author's calculation the table reflects the impact of firm-specific on a market-based performance measure, tobin's q. the r-square value is 18.79%, and p-value is less than 0.05. the model is somewhat https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 6, no. 1; 2022 10 acceptable. the model shows diversity even though having a positive coefficient is insignificant. among other variables, the debt to asset ratio and firm size are significant at 0.01 level. even though firm size is significant, they are exhibiting the wrong sign. panel corrected standard error (pcse) model table 11. summary of panel corrected standard error (pcse) model for model 2 variables coef. z p>│ z│ significance diversity 1.6566 2.3000 0.0210** at 0.05 board size 0.0855 0.1900 0.8490 no firm’s age 6.3317 2.6900 0.0070*** at 0.01 debt to asset ratio -0.4098 -0.7800 0.4380 no firm size -0.4483 -4.6300 0.0000*** at 0.01 constant -12.7755 -1.4400 0.1500 r-sq 0.1755 chi2 30.4300 prob>chi2 0.0000 note: * represents significance at 10% level, ** represents significance at 5% level and *** represents significance at 1% level. (underline) represents wrong sign. source: author's calculation the table reflects the impact of firm-specific on a market-based performance measure, tobin's q. the r-square value is 17.55%, and p-value is less than 0.05. this is an improvement from the random-effect model. in this model, diversity is positive and significant at 0.05 level. so, a 1 percent increase in variety on board will cause a 1.66 percent increase in profitability. among other variables, firm size and firm age is significant at 0.01 level. even though firm size is significant, they are exhibiting the wrong sign. findings and discussions upon examining the effect of gender diversity in the board of directors, the current study found that diversity on the board has positive effects on both roa and tobin's q but significantly affects only tobin's q or the market measure of profitability. tobin's q includes the present and future outlook of the company. so, it seems that investors are somewhat optimistic due to the increase in diversity on board, as this may result in more transparency and accountability. board size, even though positive, does not have any significant effect on profitability measures. it can be argued that board size has little to no impact on a firm's profitability. firm age and firm size are statistically significant in both models, but the latter is exhibiting a theoretically wrong sign. so, high firm size will translate to high profitability cannot be stated for this study. the debt asset ratio displays a theoretically correct sign in both models but is not significant for model 2. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 6, no. 1; 2022 11 table 12. comparison of two models variable expected sign fixed effect (model 1 roa) pcse model (model 2 tobin's q) actual sign significance actual sign significance diversity positive/ negative positive no positive yes board size positive/ negative positive no positive no firm’s age positive/ negative positive yes positive yes debt to asset ratio negative negative yes negative no firm size positive/ negative negative yes negative yes conclusion and implications the pharmaceutical industry of bangladesh presents the most significant white-collar job creation opportunity after the banking industry. in bangladesh, though women's employment has been the talk of the town, women in decision-making is still a questionable issue. the study attempts to analyze the contribution of gender diversity among the board of directors on the profitability of a firm in bangladesh's pharmaceutical industry. with the help of a panel data approach, this study attempts to find the link with eight years of the sample period. descriptive statistics, multicollinearity test, heteroscedasticity test, autocorrelation test, cross-sectional dependency tests, regression analysis, have been done to interpret the study. after analyzing, the pcse model and fixed effects models were chosen to interpret the data. for market measure, gender diversity's impact on tobin's q is significant, but gender diversity's impact on roa is not significant for accounting measure. hence, it can be stated that the inclusion of women on the board can enhance the company's perception among the investors. this study can be a good source for investors, policymakers, and researchers to contend with and make viable decisions and policies to improve the performance of the firms. this study incorporates only the listed companies of dse. but to get a robust result and clearer outlook, further study needs to be conducted incorporating the companies that are not listed yet. so there is a scope of future investigation on this. author contributions conceptualization: hossain ahmmed fahad data curation: imran mahmud formal analysis: atkia nabiha rahman funding acquisition: hossain ahmmed fahad; imran mahmud; atkia nabiha rahman project administration: hossain ahmmed fahad; imran mahmud software: hossain ahmmed fahad; imran mahmud validation: atkia nabiha rahman https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 6, no. 1; 2022 12 writing – original draft: hossain ahmmed fahad; imran mahmud writing – review & editing: hossain ahmmed fahad; atkia nabiha rahman conflict of interest statement the authors declare that they have no competing interests. acknowledgement all authors contributed equally to the conception and design of the study references adams, r. b., & ferreira, d. 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(2015), board diversity and financial performance in the top 500 australian firms. australian accounting review, 75(25), 414–427. appendices appendix a: list of textile companies no. codes in dse no. codes in dse 1 aci 15 jmismdl 2 aciformula 16 keyacosmet 3 acmelab 17 kohinoor 4 activefine 18 librainfu 5 afcagro 19 marico 6 ambeepha 20 orioninfu 7 beaconphar 21 orionpharm 8 bxpharma 22 pharmaid 9 bxsynth 23 reckittben 10 centralphl 24 renata https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 6, no. 1; 2022 15 11 farchem 25 salvochem 12 ghcl 26 squrpharma 13 ibnsina 27 watachem 14 imambutton copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (https://creativecommons.org/licenses/by/4.0). asian finance & banking review vol. 5, no. 1; 2021 issn 2576-1161 e-issn 2576-1188 published by cribfb, usa 38 economic consequences and variables influencing the uptake of mobile financial service in unbanking population like pakistan zara younus mba in finance karachi university business school university of karachi, pakistan e-mail: zara44younus@gmail.com dr. sohaib uz zaman assistant professor karachi university business school university of karachi, pakistan e-mail: sohaibuzzaman@uok.edu.pk abstract the growth of digital mobile devices enables the world to integrate and enables the masses to access and use services with optimism, speed and efficiency. these developments are on the rise in pakistan. market opportunities for digital financial services in pakistan are projected to exceed $ 36 billion by 2025, which will increase gdp by 7%, create four million new jobs and generate $ 263 billion in new deposits. this power can only be achieved through a robust and efficient dfs environment. although pakistan has a dfs environment, it is unfortunate that so far no research has been done to determine and analyze the economic impact of mobile banking services as well as factors affecting their use in developing countries like pakistan, to this end, the methodology part will be divided into two parts: the first part will focus on the secondary data to analyze and determine the impact of mobile banking activity on gdp, employment, government taxes for support to reduce non-banking figures in pakistan. the second part will focus on the primary data that will be used to investigate the influencing variables on the usage of mobile banking services. a self-administered questionnaire has been developed with 250 respondents, which will be distributed to mobile money users to get their ideas on mobile banking services. its results will be evaluated using the pearson correlation and multiple regressions. affective factors are assessed under five factors: risk, perceived trust, costeffectiveness, accessibility and reliability using biometric analysis method in mobile banking. the study revealed that mobile financial services had positive impact on the economic indicators whereas factors like perceived trust, convenience and perceived risk had a significant influence on the adoption of mobile banking services but perceived cost and reliability were said to have insignificant influence on its adoption. keywords: mobile financial services, adoption, economic impact, pakistan. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 39 introduction individuals in need of capital may be unable to receive it due to a lack of access to financial services (johnston & murdoch, 2008). more inclusive financial institutions can help the poor smooth their cash flows and safeguard them from economic vulnerability due to disability, accidents, theft, and unemployment. it may enable people to save and borrow, acquire assets, and make investments to change their lives (world bank, 2012)”.it can also help individuals improve their credit risk profiles, lowering the rates they have to pay for financial services, reducing personal stress, and providing access to lower-cost lending sources (caskey, 2002)”. “as a result, increasing access to financial services is crucial for development since it can boost economic growth and minimise wealth gaps. however, more than half of the world's population is still unbanked, which means they lack access to official financial institutions for saving and borrowing (chala et al., 2009)”. this was corroborated by a 2012 world bank study, which discovered that just around half of the world's adult population (51%) held accounts with a formal financial institution. lower rates are found in middle-income (43%) and low-income (23%) countries (world bank, 2012). because of the rising use of mobile phones in developing countries, there has been a lot of interest in using mobile phones to reach the unbanked, particularly through the implementation of mobile phone-based financial services. . for example, it was stated in 2009 that 1 billion people lacked access to banks but did have access to mobile phones, with this figure predicted to climb to 1.7 billion by 2012 (picken, 2009; islam & salma, 2016). in recent years, there has been a lot of investment in mobile phone-based financial services technologies, as well as debate about the potential support for the poor and financially excluded (porteous, 2006; porteous & wishart, 2006; vodafone, 2007; bengens & soderberg, 2008). one of the expected benefits of using mobile financial services is the ability to send money over vast distances, particularly little amounts of money, at a lesser cost than other options available to the poor. furthermore, it was thought that by providing financial services to the financially excluded via mobile phone networks, the poor would benefit from higher savings rates, higher income, and greater financial stress, among other things (donner & tellez, 2008). this initiative was intended to expand access to formal credit while lowering the cost of providing them. it was also intended to improve payment system efficiency and reduce dependency on cash as a transactional medium (porteus, 2006). pakistan's financial inclusiveness rate has recently reached 15%. this means that currently, 85 percent of adults in pakistan lack access to formal financial services. among the remaining 15%, 5% are fully banked, which means they have access to a full range of financial services (including savings, insurance, and credit), and 10% are economically inactive, which means they have just minimal access to financial services such as a savings account. furthermore, even among the financially involved, critical services such as insurance and credit are underutilised, and mfs is almost non-existent. financial inclusion, or the supply of low-cost financial services to a community, has been connected to a country's fulfilment of crucial economic and social goals. the provision of financial services attracts credit to the banking system, resulting in greater gdp. it encourages entrepreneurship by enhancing domestic capital formation. it also enhances the depth of a country's private sector, which leads to the creation of new jobs. these financial innovations diminish a country's total income disparity, increase income growth among the poorest quintile of the population, and accelerate poverty reduction. overall, the focus of this study will be on the economic benefits of mobile financial services, as well as the numerous factors that influence their utilization. previous research has found a correlation between mobile banking usage and trustworthiness (bhattacherjee, 2002). https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 40 lee (2009) found a strong relationship between mobile banking usage and perceived risks but no link between mobile banking usage and security risk. along with these factors, (reliability) is expected to have a significant impact on how individuals use mobile financial services. a consumer must be confident that the system is reliable, that it protects their security, privacy, and data integrity, and that it provides a secure authentication method for mobile banking. as a result, this study will concentrate on the potential use of detection authentication to alleviate security issues while boosting the dependability and trustworthiness of mobile financial services for clients. literature review mobile financial services and economic growth absence of capital, obligation assortment, liquidity, income execution, and low deals are the critical part of pecuniary (financial) limitations for private companies in non-industrial nations (bngens & söderberg, 2011a). chale and mbamba (2015) concurred with bngens and söderberg (2011b) that mobile money improves small companies in tanzania in an assortment of ways, including deals exchanges, stock buys, installment receipts, products and service installment, all of which bring about worked on economic execution. andrianaivo and kpodar (2012) found that in nations where mobile money has been sent, there is a positive connection between financial inclusion (as characterized by advance records per individual) and economic growth. in this manner it forms the following hypothesis: h1: mobile financial services would have a significant and favorable impact on the country's economic growth mobile financial services and factors influencing its adoption technology acceptance model have been truly examined and endorsed, and they are the most consistently used models for depicting how clients recognize new advancement (venkatesh & davis, 2000; omwansa et al., 2012; masinge, 2010). these examinations utilized the original tam components along with different variables like risk, trust, and cost of mobile monetary services. from literature review and for the purpose of this study, the study framework comprises of the elements that are affecting the reception (acceptance) of mobile banking services dependent on tam approach as explanatory variable and reception of mobile monetary services as a predicted variable. perceived trust according to dass and pal (2011a), trust is a mental assumption that a believed part won't act sharply. thus, when the client's confidence in the services provider rises, so it will build their eagerness to take part in versatile mobile financial transactions (masinge, 2010). as indicated by bengens and söderberg (2008), a financial framework and its entertainers should be trusted, and they should chip away at rules that cultivate customer trust. dass and pal (2011b) found that in their investigation on rural unbanked adoption of mobile financial services, villagers preferred channels that could be trusted to conduct monetary transaction. as per considers, trustworthiness impacts the uptake of mobile banking services (masinge, 2010; amin, baba, & mohammed, 2007; horne & nickerson, 2013; chitungo & munongo, 2013; lule, 2008). https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 41 h2: perceived trustworthiness in mobile financial services will have a beneficial impact on mobile financial service adoption convenience convenience is connected to the yield that comes from utilizing innovation (amin et al., 2007). as indicated by davis (1989), convenience is how much an individual thinks that utilizing a specific strategy will work on their exhibition. various examinations have shown that perceived usefulness essentially affects the acknowledgment of mobile banking services (aboelmaged in gebba, 2013; chitungo & munongo, 2013; davis, 1989; li, 2010; sayid et al., 2012). chitungo and munongo (2013) in their review on the acknowledgment of mobile banking in zimbabwe tracked down that ease of use decidedly affects the acknowledgment of mobile money services. based on these studies the following hypothesis is proposed: h3: convenience will have a beneficial impact on mobile banking service adoption perceived risk perceived risk addresses vulnerability, a forthcoming misfortune, or a security break that could bring about a financial misfortune (chitungo & munongo, 2013; lee, 2009). monetary danger, security or protection hazard, social danger, time hazard, and execution hazard are for the most part instances of perceived risk (lee, 2009). it is contended that the utilization of mobile financial services raises worries about monetary misfortunes, secret word security, network issues, hacking, and individual data misfortune. therefore, it is said that perceived risk adversely affects mobile financial take-up. h4: perceived risk will have a detrimental effect on mobile financial service adoption perceived cost how much an individual accepts that utilizing mobile financial will cost cash is portrayed as cost (chitungo & munongo, 2013). the expense might incorporate transactional costs, for example, service charges, mobile communication charges (like sms or information), and cell phone costs (chitungo & munongo, 2013). dass & pal (2011a) found that monetary expense unfavorably affects the take-up of digital financial services. moreover, cost contemplations might deter people from accepting mobile banking services in case they are restrictively costly, yet in case they are sensible, it tends to be an inspiration for quicker reception (tobbin & kuwornu, 2011). in light of the above literature review, the accompanying hypothesis is proposed as: h5: the perceived cost of mobile financial services will have a major negative impact on the adoption of mobile financial services reliability reliability can likewise be considered as a predictor variable in the reception and utilization of digital banking services that can be included in tam system since client acknowledgment is the super basic part in the reception of innovation like mobile money services without which any innovation can be outdated so for this reason solid and secure technique can be consider like bio metric instrument for accomplishing the client trust and acknowledgment in online payments through cell phone. buckley and nurse (2019) appear to demonstrate that fingerprint scanning is https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 42 a widely used authentication mechanism. finally, a 2015 south korean study found that consumers are more inclined to utilise methods that are less secure but easier to use, such as fingerprint scanning. finally, arguably the most concerning finding from their survey was that 83% of respondents believed biometric authentication methods are equally secure as passwords. h6: reliability will have a significant impact on the use of mobile financial services research problem this study focuses on the economic impact of mobile financial services and the factors that influence their use in developing countries such as pakistan, where the majority of the population does not use mobile internet or have access to formal financial services, putting them at risk of missing out the economic benefits of digital transformation. gender, regional, economic, and literacy barriers all contribute to the exclusion gap. in pakistan, for example, women are 37% less likely than men to own a cell phone. addressing the issue of service access and consumption is critical to optimising the impact of mobile-enabled digital transformation in pakistan. thus it addresses the following questions to be answered: question 1: does mobile financial service has positive effect on country’s economic growth? question 2: what factors will influence its usage? research gap it is obvious that a vision of a technologically advanced financial inclusive ecosystem cannot be realised without the deployment of technologically innovative financial systems and solutions that provide unrestricted access to financial services to all citizens in the country. the idea is to leverage mobile financial services to create markets so inclusive that even tiny businesses in pakistan, such as women who prepare fruit relishes in rural areas, can sell their products online across pakistan and collect revenue digitally in their mobile wallets. though pakistan has a nascent and transformational role in the mfs ecosystem, the economic ramifications and factors that impact its use have been understudied thus far. as a result, it is deemed necessary to fill the gap by researching the connectivity of mobile financial services with the implications of economic factors and factors such as (perceived risk, trust, convenience, perceived cost, and reliability) that affect its usage when widely adopted in lower-middle income countries such as pakistan. significance of the study the importance of this study is that mobile banking is not intended to replace the banking system today; rather, they aim to expand it and create more employment opportunities for many. communication companies have a clear advantage in providing customers who have difficulty accessing traditional mobile banking services. the carrier (mobile operator) has a pre-existing relationship with customers who have purchased the required mobile phone, and it is a wellknown brand and trusted with a large secure server. with its vast experience serving many customers and answering their needs, the user is also able to focus on long tail customers. traditional financial institutions often focus on people with large finances, high profits, and long stays. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 43 research methodology as mentioned before, pakistan has gained a dynamic role in mobile money services, but the economic implications and factors influencing the usage of mobile money services have yet to be thoroughly investigated. to solve this diagnostic problem, this study will focus on primary and secondary data. the secondary data will describe a graphical representation of the impact of mfs (mobile financial services) on the economic benefits on which first alternative hypothesis is based upon as its reference is given in the literature review. to test the remaining five hypothesis, primary data (questionnaire) will be used to study tam (technology acceptance process) such as risk assumptions, trust assumptions, perceived cost, reliability, accessibility which will affect the use of mobile money services. theoretical structure data collection data will be collected using an automated questionnaire that was provided to respondents who have access to mobile financial services for initial data collection. a closed-ended questionnaire was used, respondents were asked to give their views on the statement examining the structure at five point likert scale, with 1 indicating strong disagree, 2 indicating disagree, 3 equal to neutral, 4 equal to agree and 5 equal to strongly agree. mobile money makers was the target market for the study with a sample size 250, depending on the rule of thumb that the rate of change in size should be more than 200 (brown, 2006). respondents were selected by using a purposive sampling technique. this process was used to get responders with mobile phones and subscribers who use mobile money services. this study uses five independent concepts, namely: convenience (perceived ease of use, usefulness), risk factors, perceived trust, costs and reliability https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 44 to measure factors affecting the acceptance of mobile financial services. for the purpose of the secondary data collection, the data will be analyzed by “the economic and social impact of mobile services (analysis of pakistan, india, bangladesh, serbia and malaysia) by the relevant authorities boston (bcg) april 2011” research techniques regression model the linear multiple regression line has been identified as follows: amf = α1+ β1 pr+ β2t + β3c + β4 pc+β5 r amf = adoption of mobile financial service pr = perceived risk t = trust c = convenience pc = perceived cost r = reliability α1 = acceptance of mobile financial services without change of risk, trust, accessibility, cost and reliability. β1 = partial changes in the acceptance of mobile banking services as a result of a change in the perception of risk while other factors persist. β2 = the partial change in the adoption of mobile financial services as a result of one unit change in the trust variable when all other variables remain constant. β3 = the partial change in the uptake of mobile financial services as a result of one unit change in the convenience variable while other things remain constant. β4== a partial acceleration in the uptake of mobile financial services as a result of a one-unit change in the perceived cost variable while other factors remain constant. β5 = the partial change in mobile financial service uptake as a result of one unit change in the reliability variable while other things remain constant correlation the correlation method is used to determine the strength of the relationship between the two data sets. algorithms provide ratings from -1 to 1, while 1 indicates the best association. significant negative association was demonstrated by the value of -1. zero results indicate no association. data analysis of primary data reliability testing (pilot testing) case processing summary n % cases valid 250 100.0 excludeda 0 .0 total 250 100.0 a. list wise deletion based on all variables in the procedure. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 45 reliability statistics cronbach's alpha n of items .957 78 the cronbach alpha was used to evaluate the internal consistency of the variable (cronbach, 1951). for this reason, an experiment was conducted to determine the consistency of the variables. the results revealed that all the variables produced were reliable, with an alpha rate of more than 0.70, or 0.957, as suggested by nunnally and bernstein (1994). results of factors affecting the adoption of mobile financial services correlation the correlation between the variables was between r -0.018 and r 0.0684. the strongest correlation between predictor variables was found between trustworthiness and accessibility as convenience (r = 0.684) indicating strong correlation between variables. results showed that trustworthiness had a positive correlation with convenience (r = 0.684 and p <0.01) and reliability (r = 0.627 and p <0.01). perceived risk has a significant relationship with only cost as independent variable. the significant values of the correlation between predictor and predicted variables ranged from r = -0.142 to r = 0.701. the results shown in table 2 show that trustworthiness and accessibility had a strong and significant relationship with the adoption of mobile financial services with r 0.701 and 0.680 at a significant p <0.01 higher than the other independent variables. reliability also showed a positive correlation with the acceptance of mobile money services at p <0.01. the perceived risk showed a significant negative association with adoption at the p <0.05 level. it was revealed that perceived cost has insignificant influence on the adoption of mobile financial services. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 46 regression analysis (hypothesis testing) model summary model r r square adjusted r square std. error of the estimate 1 .762a .581 .573 .44917 a. predictors: (constant), perceivedcost, perceivedtrust, perceivedrisk, reliability, convenience r square gives a record of the measure of changeability in the predicted variable represented by the predictor variable (bordens & abbott, 2011). so for this situation the above table shows that the worth of r is 0.762 which is illustrative of the relationship esteem between explanatory and response variable. the above model shows that value of r2 is 0.581 which shows variability of predictor variable on predicted variable. 0.573 adjusted r square and st. deviation error of the estimate = 0.44917 fluctuation of forecast. the correlation value is positive and depicts a good strength of relationship between the dependent and independent variables. the r square value is 0.581 which is explaining that diversified results are 41.1% of variation in dependant variable which is adoption of mobile financial services. it means that 58.1% of variability shows how the current factors like perceived risk, perceived trust are affecting adoption of mobile financial services and whether it is dependent on other factors not given in this study but they have impact on its adoption. anova model sum of squares df mean square f sig. 1 regression 68.036 5 13.607 67.445 .000b residual 49.026 243 .202 total 117.062 248 a. dependent variable: mobilefinancialserviceadoption b. predictors: (constant), perceivedcost, perceivedtrust, perceivedrisk, reliability, convenience table anova test shows the level of significance and f-status value. the results of this test show that factors like perceived risk, perceived cost, reliability etc. are significantly contributes towards the adoption of mobile financial services that is (f=67.445 & p=0.000) which also means that overall regression model is showing a good model fit. coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) .815 .227 3.585 .000 perceivedtrust .380 .057 .401 6.639 .000 convenience .351 .064 .344 5.488 .000 perceivedrisk -.124 .049 -.115 -2.541 .012 https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 47 reliability .083 .059 .083 1.407 .161 perceivedcost .043 .040 .049 1.070 .286 a. dependent variable: mobilefinancialserviceadoption perceived trust the idea of trustworthiness hypothesis proposes that this independent variable can altogether affect the uptake of mobile money, the result of this analysis also reveal the same thing (â = 0.380, p = 0.000). the results are correspondent with the previous researches that show trustworthiness has beneficial impaction on the reception of mobile money services (dass & pal, 2011b; chitungo & munongo, 2013; marumbwa & mutsikiwa, 2013). convenience the regression analysis found that perceived usefulness and perceived ease of use have a significant influence on mobile financial service uptake at p 0.01 significance level with â= 0.351. these findings support the hypothesis that convenience has a major beneficial impact on mobile financial service adoption. the null hypothesis that convenience has no effect can be rejected because the p-value is less than 0.01. discoveries are harmonious with davis' (1989) idea of technology acceptance model (tam), which depends with the understanding that convenience is the prime factor in influencing new innovation acknowledgment. different researhers, including chitungo and munongo (2013) in zimbabwe, lule (2008) in kenya, marumbwa and mutsikiwa (2013) in zimbabwe, and dahlberg, mallat, and örni (2004) also found that convenience was significant in evaluating clients' reception behavior in new technology and testing it with different factors in contrast with davis' first reception innovation model (1989). reliability with â=0.083, p>0.01, the discoveries of this review demonstrated that reliability essentially affected the take-up of mobile money services. it follows that the utilization of a biometric finger impression scanner can't be a solid and safe strategy of making installments or moving cash through digital financial services. the discoveries negate past research, which found that buckley and nurse (2019) seem to suggest that unique mark checking (bio metric) is a broadly utilized verification strategy in mobile banking. perceived risk the risk as predicted variable contrarily affected the reception of digital financial services (â = 00.124, p = 0.012 <0.05), as per the hypothesis. different researches on risk factor show that it has detrimental effect on the uptake of mobile money services (marumbwa & mutsikiwa, 2013; dass & pal, 2011a; dahlberg, mallat, & örni, 2004) support the legitimacy of this review. perceived cost the past discoveries demonstrated that cost had insignificant effect on the reception of digital financial services at the p >0.01 significance level with â = 0.043. other examination (tobbin & kuwornu, 2011; marumbwa & mutsikiwa, 2013; dahlberg, mallat, & örni, 2004; dass & pal, 2011b) uncovered that cost actually affect this predicted variable. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 48 data analysis of secondary data economic impact of mobile financial services the boston advisory group (bcg) examines the impact of mobile money in emerging economies, particularly how having access to bank accounts and credits will change the way people live, work and develop over the years. to guide this study, the forecast from bcg was used to analyze what the picture would look like by 2020. based on bcg forecast, mobile banking activity could reduce financial exclusion by 5-20% by 2020. impact on gdp figure 1. impact on gdp (saskatoon, 2018) there is good evidence that increased investment contributes to gdp. as entrepreneurs with a good business idea get loans, the economy grows and creates jobs. a productive society means many new businesses and new jobs. with mobile money services, by adopting services, pakistan's gdp could grow by $ 20 billion, or 3% by 2020. in addition, there is a kind of accounting benefit of saving money in the banking system, as this would promote the creation of other credits and investments. new job creation figure 2. new job creation (saskatoon, 2018) https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 49 by 2020, if mfs adoption increases by 20%, 600,000 new businesses could be created, creating 1 million new jobs, an increase of 1.3%. that is equivalent to new jobs for 1 out of every 10 pakistanis currently unemployed. tax revenue growth figure 3. tax revenue growth (boston, 2011) the benefits of economic growth stimulated by mfs would increase in tax revenue. corporate taxes could rise due to the creation of new businesses along the mfs value chain, increasing profits in existing businesses through savings from mfs, and expanding the business made possible by mfs. this growth in business creation could create new jobs, which means higher taxes and income for employees. mfs could add $ 2 billion annually to pakistan’s government budget by 2020, an increase of 3%. discussion of the results on the basis of hypothesis the variables were tested, results of variables like perceived trust, convenience and perceived risk found consistent with earlier studies and other variables like reliability and perceived cost found to have no significant impact on the adoption of mobile financial services as their p value is greater than 0.05.similarly data related to economic impact of mobile financial services is also consistent with earlier studies indicating the acceptance of alternative hypothesis. scope for future research social factors such as race, age, gender and culture in the acceptance of mobile banking services have not been studied. according to lee (2009), the cognitive propensity of individuals to risk varies between cultures, and various demographic characteristics have interrelationships that may influence mobile financial services uptake. this implies that cultural differences may influence client adoption of mobile banking. again, because the majority of participants were from karachi, this poll was restricted to adults aged 18 to 30. including people of diverse ages from both the city and the villages may result in more accurate results. nonetheless, the risk and https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 50 trust issues demand a more in-depth examination in order to popularise mobile banking throughout the country. because secondary data on the economic impact of mobile financial services was predictive, self-collected/primary data should be employed in future studies to make the results more precise. conclusion this study was successful in identifying the factors influencing the use of mobile banking in pakistan. according to the conclusions of this study, perceived risks, trust, and convenience are the factors impacting mobile users' behavioral intention to use mobile financial services in pakistan. as a result of this research, banks, service providers, and software developers now have more knowledge and information to improve consumers' willingness to use mobile financial services in the future. to summarise, mfs has a lot of potential, but it also has significant limitations. . more than 2.5 billion people in developing countries are impoverished, but many have mobile phones and have formed partnerships with telecommunications corporations. mfs has the potential to be the most powerful economic growth weapon for all of the countries especially for pakistan. a variety of factors must be developed in order for this potential to be realised. finally, as the mfs ecosystem evolves, regulators must provide a welcoming climate that minimises risk while allowing for flexibility and innovation. references andrianaivo, m., & kpodar, k. 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(2012). the little data book on financial inclusion 2012. international bank for reconstruction and development/the world bank. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (https://creativecommons.org/licenses/by/4.0) asian finance & banking review 6(1) (2022), 25-32 25 finance & banking review asfbr vol 6 no 1 (2022) p-issn 2576-1161 e-issn 2576-1188 available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/asfbr published by cribfb, usa the components impacting customer’s bank determination choice in mogadishu, somalia isse sudi mohamed (a)1 md. salim chowdhury (b) md. al-imran (c) md. ali imran (d) afsana mimi (e) (a) independent researcher, mogadishu, 00000, somalia; e-mail: issejaran@gmail.com (b) master of science in business analytics, college of graduate and professional studies, trine university, allen park, miicigan 48101-3636, usa; email: mchowdhury23@my.trine.edu (c) master of science in business analytics, college of graduate and professional studies, trine university, allen park, miicigan 48101-3636, usa; email: malimran23@ my.trine.edu (d) assistant professor, department of business studies, faculty of business & entrepreneurship, daffodil international university, bangladesh; e-mail: imran@daffodil.ac (e) lecturer, department of business administration, faculty of business & entrepreneurship, daffodil international university, bangladesh; e-mail: afsana.ba0178.c@diu.edu.bd a r t i c l e i n f o article history: received: 21st october 2022 accepted: 17th december 2022 online publication: 30th december 2022 keywords: service quality, accessibility, image and reputation, bank selection choice jel classification codes: d6, l1, l2, l8 a b s t r a c t the primary goal of this study is to concentrate on the factors influencing customer bank selection in mogadishu, somalia. the study's objectives are "to investigate the role of bank image and reputation on bank selection decisions in mogadishu, somalia." and "to find the effect of convenience on bank selection decisions in mogadishu, somalia." the study used a descriptive research design with questionnaires as the primary data collection method. the sample size for this study was 80 people, with 95 bank customers as the target group. the slovene form was used to collect the sample for this investigation.i proposed that bank marketers develop acceptable products and marketing programmes. bank marketers should have a clear distribution of policies on specific and general techniques for persuading customers to choose a specific bank. customers suggest some additional banking sector enhancements in addition to the services currently provided. service quality influences bank selection decisions, as do bank image and reputation, bank reliability, and bank selection. © 2022 by the authors. licensee cribfb, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). introduction since the early 1980s, the banking industry has been marked by increasing competition (blankson et al., 2015; alam & nahar, 2022). this is due to a number of interconnected variables, such as competition and deregulation, which have changed the distribution of a variety of financial services. in other words, increased competition in the financial services industry as a result of a decade of deregulation has left banks with the burden of distinguishing themselves and offering to attract customers (blankson, 2015). as in a financial crisis, the banking industry is critical to ensuring the country's financial system is stable. this industry has been defined as one of increasing rivalry since the early 1980s. because the analytical framework of this theory excludes banks and the financial sector in general, the conventional perception of the financial system as a component contributing to growth faded in academic circles as the neoclassical theory of economic growth gained widespread popularity. furthermore, while some economists continued to see the financial expansion as a growth engine, others argued that it was a result and symptom of genuine economic progress rather than a cause (schmidt & tyrell, 2003). understanding and adapting to customer motivation, attitudes, and ultimate selection decisions for 1corresponding author: orcid id: 0000-0003-4516-0668 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/asfbr.v6i1.1890 to cite this article: mohamed, i. s., chowdhury, m. s., imran, m. a.-, imran, m. a., & mimi, a. (2022). the components impacting customer’s bank determination choice in mogadishu, somalia. asian finance & banking review, 6(1), 25-32. https://doi.org/10.46281/asfbr.v6i1.1890 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/asfbr.v6i1.1890 https://orcid.org/0000-0003-4516-0668 https://orcid.org/0000-0001-5499-677x https://orcid.org/0000-0002-9340-5642 https://orcid.org/0000-0002-4732-063x https://orcid.org/0000-0003-1055-9919 mohamed et al., asian finance & banking review 6(1) (2022), 25-32 26 offerings such as banks is no longer an option but an absolute necessity, given the changing international market environment, widespread adoption of information technology, and the emergence of the phenomenon of the "global village" (levitt, 1983; kotler, 2000). an important research endeavour to that end is to investigate the factors influencing consumer bank selection in various countries (blankson, 2015). as a result of the current global financial crisis, research on the selection criteria used by consumers to choose a bank for conducting business in japan has been expanded, with new methodology, findings, and suggestions for banks and customers. this is especially significant considering that banks and the (ali et al., 2020a; ali et al., 2020b) financial industry as a whole have suffered a loss of image and confidence as a result of the financial activities that contributed to the economic crisis. the rising competition in sudan's banking market, as well as the similarity of services provided by sudanese banks, necessitates banks identifying the important elements influencing bank customers' selection decisions. to shape their service delivery and build a robust growth strategy that focuses on products and services that customers value the most and motivates them to deal with their bank, it is critical to understand the bank selection criteria that customers use to choose between financial service providers (kabir et al., 2021; nayeen et al., 2020; nahar et al., 2021; rahman et al., 2021a; rahman et al., 2021b; shahriar 2021a; shahriar 2021b; zayed et al., 2022c; bhuiyan et al., 2022;; shayery et al., 2022). the study's purpose was to investigate the components impacting a customer’s bank determination choice in mogadishu, somalia. the findings of this study will help bank decision makers identify the major factors that may impact customer bank selection decisions. this data can help bank executives design effective marketing strategies for reaching and attracting customers. it will also help with their client retention efforts. furthermore, the study's findings might be shared with other financial service providers such as microfinance and insurance. despite a growing financial sector in (chowdhury et al., 2020; chowdhury et al., 2021; s. chowdhury et al., 2021) somalia, where multiple commercial banks have recently arisen as a result of a decade of stability and economic success, there is a scarcity of such study on somali banks. the growing financial industry has created competition among banks that largely provide equivalent financial goods and services. as a result, in order to be successful and thrive in this industry, banks must attract new clients while maintaining old ones. the need to attract and keep customers should drive banks to differentiate their goods and services from those of competitors. bank managers in mogadishu, somalia will be able to identify and understand their customers' purchasing behaviours, why they choose certain banks, what they value and expect from bank services, how they make selection judgements, and what variables impact their bank selection decisions. finding such information would help retail banks in (iqbal et al., 2021; kader et al., 2019; kader et al., 2021a; kader et al., 2021b) mogadishu, somalia, comprehend and prepare proper marketing programmes and procedures to attract new customers and keep existing ones. according to the preceding, this study gives critical information to banks by investigating factors that impact bank selection decisions in mogadishu, somalia. unemployment is defined as "someone of working age (16 and above), unemployed, able and available to work, and actively seeking employment." this includes anyone who is unemployed and is reaching out to contacts about job chances or applying for positions. due to the similarity of services supplied by banks (holstius & kaynak, 1995), understanding the aspects that determine the foundation on which clients decide between suppliers of financial services has become more important for banks. this is because bank customers are likely to have an infinite number of switching choices in a highly competitive industry. as a result, it is becoming increasingly crucial for banks to identify the factors that impact clients' decisions to switch financial service providers (rao & sharma, 2010; alam & nahar, 2022). furthermore, knowing consumers' bank selection criteria has been proposed as useful to banks in formulating the correct marketing methods necessary to attract new clients and retain existing ones. furthermore, the outcomes of the study might be shared with other financial service providers, such as microfinance and insurance. there is minimal literature on why clients of ethiopian banks transfer from one bank to another, to the best of the researcher's knowledge. against this context, the purpose of this research is to examine the factors that influence consumers' choice of commercial banks in ethiopia. a research analysing the factors of client bank selection in somalia is supposed to address a gap in the literature. literature review the key factors that impact consumer bank selection are as follows: service efficacy and efficiency. the most important element that influences a customer's choice to pick a bank is service quality. when transaction rates are fast or efficient, the chance of switching banks lowers. customers' decisions to pick a bank may also be explained by the bank's service variety and quality. when a bank's service offerings are diversified, it attracts clients' attention. when it comes to picking a bank, female clients priorities service quality above male customers. banks that provided additional supplemental services were regarded positively (cicic et al., 2004). it was also demonstrated that banks that provided more supplemental services were evaluated positively. according to the mohamed et al., asian finance & banking review 6(1) (2022), 25-32 27 data, money safety, efficient service quality, and transaction speed all have a substantial favorable impact on consumers' bank choosing preferences. it is vital to comprehend the consumer character, which may be grouped into five categories: intangibility, inseparability, heterogeneity, perishability, and ownership, in order to achieve customer happiness. this is due to the fact that each category's opinion of service quality differs from one another, which will influence a customer's choice of bank indirectly (iymperopoulou, 2006). consistency throughout the year not only enhances the probability that a product or service will operate as expected, but it also assures on-time delivery. this assists in (khan et al., 2022a; khan et al., 2022b; mia et al., 2022; rubi et al., 2022)detecting customer experience indicators and potential risks of losing business to competition. tanzania, which has six fully-fledged islamic banks, identified the benefits of corporal efficiency, trust, core banking services, and other factors. the majority of respondents emphasized non-islamic aspects. customers will evaluate several typical characteristics while selecting a bank, such as the overall image of the bank, the bank's goodwill among customers/reputation, advertising in (zayed et al., 2021a; and zayed et al., 2021b; ahmed et al., 2022) mass media, the bank's current appearance/external appearance, employee clothing, transaction security, and financial performance. a study was performed, and respondents rated bank reputation as the most significant factor. according to financial elements such as cash security are highly important in the thoughts of customers. both are subjective, but a reputation might be positive or negative, whereas an image can simply be. that doesn't mean your image has to stay the same or that there aren't any judgments that need to be adjusted. working with a corporate image consultant may help you determine where your brand's image stands and provide a starting point for repositioning it in a more favorable light. consumers want to know if their deposits are safe at the bank and if they can trust and remain loyal to the bank that they have selected. according to a poll of respondents, security concerns are linked to the bank's reputation. some respondents stated, "over the bank reputation, people know which bank can be trusted, and they personally would not go out for just any bank but have proved over time." some respondents indicated that the renowned bank is (al-quraan et al., 2022; faisale-alam et al., 2022; zayed et al., 2022a; zayed et al., 2022b) trustworthy, and that any transactions with the reputable bank made them feel protected in comparison to other banks. a bank is a financial intermediary that generates money by lending money to borrowers, resulting in a deposit on the bank's balance sheet. a banking system is a collection or network of entities that offers financial services to the public. these companies are responsible for maintaining a payment system, issuing loans, receiving deposits, and aiding with investment. lending can be done directly through loans or indirectly through capital markets. with the introduction of technology and its penetration into all business domains, banks' obligation has grown to deliver better, faster, and more ubiquitous services to consumers to generate more money and hence profit. the banking activity comprises receiving money on current or deposit accounts, paying and collecting cheques drawn on or paid in by customers, issuing advances to customers, and any other business prescribed by the authority for the purposes of the country's banking act (aithal, 2016). in order to establish an efficient marketing plan for maintaining current customers and obtaining new ones, commercial banks must analyze the elements that impact potential customers' bank selection decisions. banks play a vital role in boosting economic efficiency by directing funds away from resource-rich units and toward those with more productive investment opportunities. it also helps to enhance commerce and payment systems by cutting transaction costs and increasing ease. in other words, increased competition in the financial services industry as a result of a decade of deregulation has prompted banks to distinguish their organizations and offerings in order to attract clients. competition is a critical driving force in improving the operation of banks in an economy; without competition, efficiency and financial sector development are improbable (alam & khan, 2022). materials and methods the logical and systematic technique for designing and guiding a piece of research is characterized as research design. it is the overarching strategy for how the researchers want to put their projects into action (rabiee, 2004). this study used the descriptive approach as an appropriate methodology to describe and analyze the current state of the study. furthermore, the quantitative technique was applied in the study since the research addressed the research purpose through empirical evaluations using numerical measurement and analysis. finally, this study employed a cross-sectional design. the term "target population" refers to a specific group of people from whom researchers want to collect data or statistics (hair et al., 2006). as a result, the bank clients in mogadishu, somalia, were the study's target demographic. in this chapter, the researcher assumes a target population of 95 bank clients, chosen at random from the leading commercial banks in mogadishu, somalia. the sample size for this study was 95 respondents from four major banks in mogadishu. the sample size is classified in the table below. this study's sample size was 80 supervisors, and the researchers chose only three commercial banks in mogadishu, somalia. n=n/ (1+ne) 2 mohamed et al., asian finance & banking review 6(1) (2022), 25-32 28 where, n = the sample size n = total population e = margin of error as a result, the sample size was calculated as follows: n = 95 e= 5% / 0.05 n = 95 / [1 + 95(0.05)2] = 80 data analysis is the process of putting wrongly collected or coded data into a data collection. the two most critical criteria in the data analysis process are editing and coding. data analysis is the process of putting wrongly collected or coded data into a data collection all data were analyzed using spss (statistical package for social science). spss is a computer application used for survey authoring, data mining, and statistical analysis. the researcher will use this application since it is a more convenient and straightforward tool than spss v.20. results and discussions according to table 1, the level of service quality was rated average mean (m = 2.134) overall and standard deviation 1.026 overall, indicating that overall service quality and bank selection decision in these few selected commercial banks was very excellent. table 1. service quality s/n statement number of the respondents mean standard deviation clarification 1 the bank's ability to provide excellent customer service influences your bank choosing selections. 80 1.79 .953 excellent 2 the accuracy of the service transaction influences your choice of bank. 80 2.17 .904 very good 3 the bank's ability to provide quick and efficient services influences your bank choosing options. 80 2.08 .982 very good 4 the bank's provision of frequent and consistent bank statements influences your decision-making. 80 2.30 1.123 very good source: primary data, 2022 according to table 2, the overall image and reputation level was scored average mean (m = 2.28) and standard deviation 1.391, indicating that overall image and reputation and bank selection choice in these few selected commercial banks was very excellent. table 2. reputation and image s/n statement number of the respondents mean standard deviation clarification 1 do you want to include the bank's founding date? 80 2.77 1.368 normal 2 your choice is the bank's reputation and favorable image. 80 2.26 1.194 very good 3 the financial stability and size of the bank are the best reasons you choose the bank. 80 2.20 1.153 very good 4 the bank's reputation is reflected in the market rate. 80 2.17 .938 very good source: primary data, 2022 according to table 3, the degree of convenience was rated average mean (m = 2.592) overall and standard deviation 1.282 overall, indicating that overall accessibility and bank selection choice in these few selected commercial banks was very excellent. table 3. accessibility s/n statement number of the respondents mean standard deviation clarification 1 it was simple to obtain the information i required to make a decision on which service provider to utilize. 80 2.47 1.231 very good 2 my selection for a bank is determined by the proximity of bank branches to my location (university, workplace, and home). 80 2.73 1.442 normal 3 my selection for a bank is determined by the proximity of atm branches to my location (university, workplace, and home). 80 2.77 1.476 normal mohamed et al., asian finance & banking review 6(1) (2022), 25-32 29 4 the bank's operating hours have been extended. 80 2.44 1.111 very good 5 it is simple to start a savings or current account. 80 2.55 1.153 very good 1.153 very good source: primary data, 2022 according to table 4. the level of the bank selection decision was rated average mean (m = 2.3) overall and standard deviation 1.178 overall, indicating that the bank selection choice in these few selected commercial banks was very excellent. table 4. bank selection decision s/n statement number of the respondents mean standard deviation clarification 1 the bank has ample seating area and a counter partition to serve its customers. 80 2.44 1.191 very good 2 the bank is a pioneer in developing innovative goods and services. 80 2.14 1.226 very good 3 the availability of technology-based services such as mobile and online banking services influences bank selection. 80 2.12 1.103 very good 4 customers are served immediately by bank workers. 80 2.48 1.218 very good 5 the bank has made significant contributions to a variety of societal causes. 80 2.32 1.152 very good source: primary data, 2022 personal characteristics such as age, education, income, and employment have a significant impact on consumer bank selection. as a result, bank marketers must create relevant goods and marketing campaigns. bank marketers should have a clear distribution of policies on specific and general techniques for luring clients to choose a certain bank. customers place greater attention on aspects such as service speed, branch network size, branch location, and bank reputation. as a result, commercial banks should take these elements into account when developing their marketing strategies, such as expanding their branch networks and offering exceptional customer service. customers recommend some further banking sector enhancements in addition to the services now provided. as a result, concentrating on the well-integrated use of technology and personnel via operations that adapt to customer demands encourages consumers to use various financial services rather than just a few. it also contributes to loyalty by fostering deeper and more complete consumer interactions. conclusions the study's major objective examined the elements that influence client bank selection decisions in certain chosen commercial banks in mogadishu, somalia. the researchers came at the following conclusions that most of the respondents were young, aged 21 to 25, single, and held a bachelor's degree, proving that most bank customers were salaam bank mogadishu somalia. generally, the number of factors impacting consumer bank selection decisions was large. author contributions: conceptualization, i.s.m., m.s.c., m.a.i., m.a.i., and m.a.i.; methodology, i.s.m.; software, i.s.m.; validation, i.s.m., m.s.c., m.a.i., m.a.i., and m.a.i.; formal analysis, i.s.m., m.s.c., m.a.i., m.a.i., and m.a.i.; investigation, i.s.m.; resources, i.s.m.; data curation, i.s.m.; writing – original draft preparation, i.s.m., m.s.c., m.a.i., m.a.i., and m.a.i.; writing – review & editing, i.s.m., m.s.c., m.a.i., m.a.i., and m.a.i.; visualization, i.s.m., m.s.c., m.a.i., m.a.i., and m.a.i.; supervision, i.s.m.; project administration, i.s.m.; funding acquisition, i.s.m., m.s.c., m.a.i., m.a.i., and m.a.i. authors have read and agreed to the published version of the manuscript. institutional review board statement: not applicable. funding: the authors received no direct funding for this research. acknowledgments: not applicable. informed consent statement: informed consent was obtained from all subjects involved in the study. data availability statement: not applicable. conflicts of interest: the authors declare no conflict of interest. references adam, o., ogolla, d., & maore, s. 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(2022). utilization of knowledge management as business resilience strategy for microentrepreneurs in post-covid-19 economy. sustainability, 14(23), 15789. https://doi.org/10.3390/su142315789 publisher’s note: cribfb stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2022 by the authors. licensee cribfb, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). asian finance & banking review (p-issn 2576-1161 e-issn 2576-1188) by cribfb is licensed under a creative commons attribution 4.0 international license. https://doi.org/10.46281/afbr.v5i1.1015 https://doi.org/10.3390/jrfm15090402 https://doi.org/10.3390/admsci12040138 https://doi.org/10.3390/su142315789 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ asian finance & banking review 7(1) (2023), 1-9 1 finance & banking review asfbr vol 7 no 1 (2023) p-issn 2576-1161 e-issn 2576-1188 available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/asfbr published by cribfb, usa customer satisfaction on e-banking services among university students in malaysia hasnita halim (a) suria abu basar (b) hanissah hamzah (c)1 nik nor amalina nik mohd sukrri (d) abul bashar bhuiyan (e) (a) lecturer, faculty of business and accountancy, universiti selangor, shah alam, malaysia; e-mail: hasnita@unisel.edu.my (b) lecturer, faculty of business and accountancy, universiti selangor, shah alam, malaysia; e-mail: suria@unisel.edu.my (c) lecturer, faculty of business and accountancy, universiti selangor, shah alam, malaysia; e-mail: hanissah@unisel.edu.my (d) lecturer, faculty of business and accountancy, universiti selangor, shah alam, malaysia; e-mail: nnamalina@unisel.edu.my (e) associate professor, faculty of business and accountancy, universiti selangor, shah alam, malaysia; e-mail: bashariuk@gmail.com a r t i c l e i n f o article history: received: 2nd november 2022 revised: 28th december 2022 accepted: 30th january 2023 published: 28th january 2023 keywords: customer satisfaction, e-banking services, reliability, security, perceived usefulness jel classification codes: m30, m31 a b s t r a c t electronic banking (e-banking) has become increasingly important due to its convenience and benefits to banking customers. the purpose of this study is to examine the factors influencing customer satisfaction with e-banking services among university students in malaysia. using a standardized questionnaire, the study utilized a cross-sectional design to collect data from 87 students based in selangor, malaysia. the findings show that reliability, security, and perceived usefulness are positively associated with customer satisfaction with e-banking services. these results indicate that customers are more attracted to banks that allow faster transactions via online portals, which are readily available, and customers perceive the system's usefulness in continuing their usage. in addition, customers stress the effectiveness of the website security system as they are concerned with the privacy of their personal information and the safety of their financial transactions while using e-banking. understanding the factors influencing customer satisfaction with e-banking services will help banking institutions in malaysia to deliver their customers an effective website with an appropriate setting and upgraded technological development to deliver first-class conditions services. © 2023 by the authors. licensee cribfb, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). introduction it is known that electronic banking (e-banking) has become one of the most important services in our daily life. as a distribution channel medium, e-banking allows banking customers to perform banking activities with ease at anytime and anywhere (saidi et al., 2016). however, e-banking services are not always perfect. in fact, there are still some negative feedbacks from the users of e-banking services. for instance, customers mentioned internet security, online banking regulations, and customers’ privacy as the most important future challenges of e-banking in india (kaushal & balaini, 2016). in addition, customers concerned very much on the fact that there is fear of identity theft and disclosing private information in online or e-banking (mogos & jamail, 2021). they feel bank may invade their privacy by utilising their information for marketing and other secondary purposes without consent of consumers. people feel very much irritated when they received calls for credit cards or insurance offers (kumar & mehrotra, 2022). therefore, it is important for financial institutions to listen to these feedbacks and make improvements, as all of these are the key determinants that will directly affect customer satisfaction as well as the reputation and performance of the financial institutions. increased competition and recent technological developments in the financial sector towards customer satisfaction have created awareness toward the e-banking services (liébana‐cabanillas et al., 2013). they added that many attempts have been made to justify differentiation and customer’s preference in terms of satisfaction with the e-banking services that customers received given that most financial institution offers similar products and services. customers now demand new levels of convenience and flexibility in addition to powerful and easy services that traditional means cannot offer leads to understand how customers perceive and evaluate e-banking service is vital for banks to succeed in the marketplace. because of the products offered to the customers of a bank are more or less standardized in nature, there is an increasing need to 1corresponding author: orcid id: 0000-0003-0857-1820 © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/asfbr.v7i1.1916 to cite this article: halim, h., basar, s. a., hamzah, h., sukrri, n. n. a. n. m., & bhuiyan, a. b. (2023). customer satisfaction on ebanking services among university students in malaysia. asian finance & banking review, 7(1), 1-9. https://doi.org/10.46281/asfbr.v7i1.1916 mailto:hasnita@unisel.edu.my http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/asfbr.v7i1.1916 https://orcid.org/0000-0001-7113-6069 https://orcid.org/0000-0003-0758-331x https://orcid.org/0000-0003-0857-1820 https://orcid.org/0000-0002-1536-2755 https://orcid.org/0000-0003-1763-124x hamzah et al., asian finance & banking review 7(1) (2023), 1-9 2 differentiate themselves from the competitors on other criteria that can influence customer satisfaction and loyalty. this requires banks continue to develop their e-banking capabilities by identifying strategies to increase access, and usage of this low-cost channel. this study argues that e-banking service is a growing area of importance which has had bigger attention in the literature. however, this study identifies a significant gap where majority of the research has focused on the adoption and behavioural intention towards e-banking usage (alalwan et al., 2017; choudrie et al., 2018), while little research has been conducted in post-adoption behaviours such as satisfaction. satisfaction has been widely accepted as a key measure of continuous use and success in the information systems and e-commerce contexts. the results of this study make an important contribution to knowledge and enhance our understanding on the aspects of e-banking service such as reliability, security, and usefulness that need to be taken into account to enhance customers’ satisfaction in e-banking usage context. the main objectives of this study are to identify the extent of customers’ satisfaction towards e-banking service and to examine the factors influencing customers’ satisfaction towards e-banking service among university students in malaysia. literature review customer satisfaction in the context of e-banking customer satisfaction generally means customer response in the context of the state of fulfilment, and customer adjudication of the fulfilled state (oliver, 2010). it is defined as any behavior with regard to product or service after it has been received and used (hayati et al., 2020). satisfaction can also be described as the feedback of a post-purchase assessment of certain service/product’s quality, and compared with the expectation of the prior-purchasing stage (kotler & keller, 2011). when considering the construct of satisfaction in the online context, forgas-coll et al. (2013) defined customer satisfaction as the contentment of the customer with respect to their prior experience with a given e-commerce corporation. in this way, esatisfaction is defined as the customer’s pleasant sense due to the positive experience with an e-service. thus, customer satisfaction is a customer’s feeling of pleasure or displeasure after he or she has distinguished a performance of a product/service with respect to his or her expectancy (das & ravi, 2021). consistent with these definitions, and in so far as this study is concerned, customer satisfaction is the attitude of the customer formulated in response to using any form of ebanking services. accordingly, e-banking attributes may increase, decrease, or keep the same customer satisfaction. figure 1 shows the research framework for this study. the central theme of the customer satisfaction process is the expectancy disconfirmation paradigm (ruyter & bloemer, 1999). according to this paradigm, a consumer's feeling of satisfaction results from comparing a product or service's perceived performance in relation to his or her expectations. if the performance falls short of expectations, negative disconfirmation occurs, resulting in a feeling of dissatisfaction. if the performance exceeds the expectations, positive disconfirmation occurs, and the consumer is highly satisfied. if the performance just matches expectations, the consumer's expectations are confirmed, and the consumer is just satisfied. building upon expectancy disconfirmation paradigm, this study attempt to sketch a new framework for understanding whether reliability, security, and perceived usefulness can influence of customer satisfaction among university students in malaysia. figure 1. conceptual framework effect of reliability on customer satisfaction reliability is the ability of the service provider to perform the promised services accurately and consistently (parasuraman et al., 2002). previous studies found that the e-banking service quality directly linked with reliability features has a significant effect on the degree of customer satisfaction. for instance, ayo et al. (2016) revealed that competence of eservice support staff, system availability, service portfolio, responsiveness and reliability, in that order, were found to be most significant in rating e-service quality. these perceived e-service qualities have a strong influence on customer satisfaction and use of e-banking, which means that greater quality of e-service has the potential to increase satisfaction and consequently result to more usage of e-banking. hammoud et al. (2018) showed that reliability, efficiency, and ease of use; responsiveness and communication; and security and privacy all have a significant impact on customer satisfaction, with reliability being the dimension with the strongest impact among bank clients in the lebanese banking sector. another study by hussien and abd el aziz (2013) revealed that each quality dimension such as reliability directly affect user’s satisfaction h1 reliability customer satisfaction security h2 perceived usefulness h3 hamzah et al., asian finance & banking review 7(1) (2023), 1-9 3 of the service, resulting to a significant effect on customer satisfaction. recently, ul haq and awan (2020) measured e-banking service quality and its impact on the loyalty through a mediating impact of e-banking satisfaction among banks’ clients in pakistan during covid-19 pandemic. they found that reliability and website design proved to increase e-banking loyalty, the link between e-banking privacy and security and ebanking loyalty proved as fully mediated by e-banking satisfaction, whereas indirect effect of the reliability and website design with e-banking loyalty was partially mediated. similarly, raza et al. (2020) found that service quality dimensions have a positive and significant influence on customer satisfaction and subsequently, has a significant and positive impact on customer loyalty. therefore, this study conjectures the following hypothesis. h1: there is a significant association between reliability of e-banking service and customer satisfaction among students effect of security on the customer satisfaction security cannot get away from privacy. privacy issues have been shown to be an important barrier for online services (kumar & gupta, 2020; suresh & rani, 2021). e-banking security is defined as the threat of creating a state, condition or event with the potential to cause difficulty to obtain data or network resources that make destruction, disclosure, modification of data, fraud and abuse (usman et al., 2020). according to kumar and gupta (2020), security means the concerns about the guarding of private information with three specific objectives, namely integrity, authentication and confidentiality. when customers decide to use e-banking services, indirectly they have actually been exposed to security risk (martins et al., 2014). customers are susceptible to harm since they provide sensitive information, such as debit and credit card information, unique identification numbers, contact number, email ids, when undertaking online transactions. it should be noted that the lower the perceived security risk involved in the use of e-banking, the more likely an individual will be willing to use it (farzianpour et al., 2014). some authors believed that for a large client-based banks, they need to guarantee the customers’ trust in the quality of technology used by the bank. among the basic attributes listed, service protection is specified. service protection is basically protecting the secrecy of personal and sensitive data, as well as transactions of customers and banks (novickytė & pedroja, 2015). previous studies have shown that data protection is one of the main indicators of customer satisfaction with e-banking (novickytė & pedroja, 2015). a study done by chen et al. (2012) revealed that customers are inclined in having higher expectations for user-friendly interface and internet transactions security. therefore, banks in taiwan are constantly improving technologies and protect themselves against potential hacking attack. in slovakia, belás et al. (2016) confirmed that security issue has become crucial element when it comes to banking activities as 90 percent of the respondents used ebanking services and 78.19 percent being the overall level of trust in electronic payments security. ul haq and awan (2020) found that the link between e-banking privacy and security towards e-banking loyalty was proved as fully mediated by ebanking satisfaction. this result implies that customer give importance to secure e-banking platforms. based on this discussion, this study assumes the following hypothesis. h2: there is a significant association between security of e-banking service and customer satisfaction among students effect of perceived usefulness on the customer satisfaction perceived usefulness is the subjective probability that the application of a new technology would improve the way a user could complete a given task (akinyemi et al., 2013). in other words, when dealing with e-banking, the superiority of internet banking compared to conventional or regular banking methods. for instance, customers who are busy and have tight schedule, having the flexibility of bank transactions through internet access is an advantage, as the perceived usefulness has a potential effect on the usage of e-banking (enaizan et al., 2017). in the context of this study, perceived usefulness implies the extent to which bank customers believe e-banking services will be useful in the fulfilment of their banking needs. past studies such as liébana-cabanillas et al. (2013) revealed that usefulness and accessibility constructs have direct influence on customer satisfaction. other studies done in jordan by abu-assi et al. (2014) and rawwash et al. (2020) showed consistency in terms of findings that satisfaction in using e-banking services by customers is positively influenced by perceived usefulness. in the context of e-banking users in jakarta, indonesia, andrea et al. (2021) found that perceived usefulness, perceived ease of use, and technology readiness having significant effect on the customer satisfaction. surprising result was revealed by ugwuanyi et al. (2021) whereby perceived usefulness did not directly predict customer satisfaction, meaning that customers expect the performance of banks’ self-service technologies to be a basic requirement. based on this discussion, this study predicts the following hypothesis. h3: there is a significant association between perceived usefulness of e-banking service and customer satisfaction among students materials and methods design, population, and sample quantitative approach with cross-sectional design using structured questionnaire survey were used as the primary research design for this study because the intention of this research is to gather data regarding satisfaction of students about their ebanking usage. the questionnaires were distributed to students in a private university located in selangor, malaysia. several criteria are outlined for the selection of respondents for this study, namely (a) respondent must be a customer at one of the banking institutions in malaysia; and (b) respondent should have knowledge about e-banking services. the selection of students who are also banking institution customers as a study sample is accurate in examining the factors that influence the hamzah et al., asian finance & banking review 7(1) (2023), 1-9 4 customer satisfaction of e-banking service because they are a group that deals with banking institutions through internet banking. the simple random sampling was used and there are 100 surveys distributed to the students. approximately, 87 percent of the valid questionnaires (n = 87) have been returned and was found useful for the analysis. preliminary assessment as a preliminary analysis of the data collected, the reliability assessment of the scales was carried out by calculating the values of the cronbach’s alpha for each construct separately. according to bougie and sekaran (2019), reliability coefficient test indicates how well the items in a set which positively correlated from one another. variables can be considered as reliable if the cronbach’s alpha value was set to 0.7 and above (pallant, 2020). table 1 depicts that all variables measuring customer satisfaction (reliability, security, and perceived usefulness) are ranging from values 0.927 to 0.962. hence, the internal consistencies of all constructs are considered acceptable since each reliability testing exceeds the suggested threshold. table 1. reliability and normality assessment results constructs cronbach's alpha skewness kurtosis no. of items customer satisfaction .927 -0.447 0.254 10 reliability .941 -0.595 0.637 10 security .957 -0.236 -0.917 10 perceived usefulness .962 -0.565 -0.571 10 further, the assessment of normality of the metric variables in this study involves empirical measures of a distribution’s shape characteristics (skewness and kurtosis). table 1 shows that the normality assessment values for customer satisfaction, reliability, security, and perceived usefulness are between ±3.00 as suggested by hair et al. (2019). therefore, this assessment confirmed that the data of this study is normally distributed. next, multicollinearity testing was done to examine the relationship among the independent variables. multicollinearity exists when the independent variables are highly correlated, with r value of more than 0.9 (pallant, 2020). the correlation coefficient results between the variables are indicated in table 2. all the independent variables show at least some positive relationship with the dependent variable, and the correlations between independent variables are less than 0.8. table 2. pearson correlation coefficient and collinearity diagnostics results customer satisfaction reliability security perceived usefulness tolerance vif customer satisfaction 1 .747*** .731*** .746*** reliability 1 .754*** .703*** 0.305 3.284 security 1 .757*** 0.367 2.727 perceived usefulness 1 0.302 3.310 note: correlation is significant at *** 1% level, ** 5% level and * 10% level, respectively, using two-tailed tests. to further check for multicollinearity, a collinearity diagnostics test (tolerance and vif values) was conducted. as shown in table 2, the tolerance values are greater than 0.10 and the vif values are lower than 10; hence, no multicollinearity problem exists (pallant, 2020). results and discussions demographic profile figure 2a depicts unsurprisingly that female (51.7%) is more than the male (48.3%), which reflects the gender gap issues in higher learning institutions’ enrolment in malaysia. further, figure 4b shows that majority of the respondents are between 21 and 23 years old. they make up more than two-third (72.4%) of the total responses to the survey given. figure 2c reveals that majority of the respondents are indian (64.4%), followed by malay (21.8%), chinese (12.6%), and others (1.1%). figure 2d discloses that minority percentage of respondents (4.6%) have foundation as their highest education level, while majority of them are undergraduate students (74.7%). there is only 17.2% of respondents acquired education up to postgraduate level such as master degree or phd. hamzah et al., asian finance & banking review 7(1) (2023), 1-9 5 figure 2a: respondents’ gender figure 2b: respondents’ age group figure 2c: respondents’ race figure 2d: respondents’ highest education figure 2e: respondents’ employment status figure 2f: respondents’ monthly income figure 2e reveals that there are 11.5% of respondents who are students but doing part-time job. since this study includes students at the postgraduate level, there are 13.8% of them are worked as full-time employees. on the other hand, majority of the respondents (69%) are unemployed. finally, monthly income received by the respondents are shown in figure 2f where majority of them received less than rm1,000 per month, perhaps from their parents. there are four respondents (4.6%) are having a monthly income between rm3,000 to rm4,999, indicating that most of the respondents belonged to the middle-to-low income category. the extent of customer satisfaction towards e-banking services this section reports the finding which relate to the extent of customer satisfaction towards e-banking services among university students in malaysia. one sample t-test was conducted to test whether the mean of overall customer satisfaction is significantly equal to or different from a specified constant. table 3 shows the mean result of 4.1356 for customer satisfaction which indicates that respondents have higher satisfaction in using e-banking service while managing their financial affairs, and it is statistically significant at 1% level. overall, significant number of the respondents agreed that they have positive intention to continue using the online banking in future. besides, respondents also revealed that by using ebanking service, they can complete a transaction quickly on the website of online banks. this result is consistent with a finding by asiyanbi and ishola (2018) as they found that customers were satisfied with e-banking due to its cashless nature, 51.7% 48.3% female male 0% 20% 40% 60% 80% 18-20 years 21-23 years 24-26 years 27-30 years 5.7% 72.4% 20.7% 1.1% 21.8% 12.6% 64.4% 1.1% malay chinese indian other 0% 20% 40% 60% 80% foundation undergraduate postgraduate other 4.6% 74.7% 17.2% 3.4% 0% 20% 40% 60% 80% part-time full-time self-employed unemployed 11.5% 13.8% 5.7% 69.0% 0% 20% 40% 60% 80% < rm1,000 rm1,001-rm2,999 rm3,000-rm4,999 75.9% 19.5% 4.6% hamzah et al., asian finance & banking review 7(1) (2023), 1-9 6 cash accessibility, saves time from bank visitation, and seamless transactions. table 3. the extent of customer satisfaction perceived by respondents n mean one sample t-test t-statistic p value customer satisfaction 87 4.1356 57.683 .000*** note: result is significantly different at *** 1% level and ** 5% level, respectively, using two-tailed tests. an independent sample t-test was conducted to compare the extent of customer satisfaction towards e-banking services among respondents based on their gender. the result in table 4 shows that there is insignificant difference in the scores of customer satisfaction among respondents based on different gender (t-statistic = 0.832ns). this finding is in tandem with njuguna et al. (2012) that suggested gender did not correlate with e-banking adoption, meaning males and females perceived characteristics of e-banking in a similar way. table 4. the extent of customer satisfaction perceived by respondents based on gender gender n customer satisfaction independent sample t-test mean sd t-statistic p value male 42 4.0738 0.7506 0.832 .408ns female 45 4.1933 0.5848 note: results significantly different at the *** 1 percent level and ** 5 percent level, respectively, using two-tailed tests factors influencing customer satisfaction this section will discuss the results for the objective to examine the factors influencing customer’s satisfaction towards ebanking service among university students in malaysia. the summary results of the standard multiple regression analysis on the factors influencing customer satisfaction are presented in table 5. the regression of model (f(3, 87) = 50.972, p value = .000***) is significant at the 1%, and the overall fit of the model is moderate with r2 value is 64.8% of the variation in the customer satisfaction. this indicates that the predictor variables in the model explained for approximately 64.8% of the total variability in the customer satisfaction. table 5. standard multiple regression results on the factors influencing customer satisfaction on e-banking service hyp. std. beta coefficient t-statistic p value intercept 3.233 .002*** reliability h1 0.297 2.514 .014** security h2 0.288 2.683 .009*** perceived usefulness h3 0.289 2.443 .017** model summary: r2 value 64.8% anova results: f-value (sig.) 50.972*** obs. 87 note: association is significant at *** 1% level, ** 5% level, respectively, using two-tailed tests. results in table 5 show that reliability has a positive and significant association with customer satisfaction on ebanking services (β = 0.297, p < .05**), hence, hypothesis h1 is supported. this finding is in line with the studies of ayo et al. (2016), hammoud et al. (2018), hussien and abd el aziz (2013), raza et al. (2020), as well as ul haq and awan (2020). this outcome indicates that by maintaining the reliability, e-banking services offered by the banking institutions can elevate the satisfaction level of customers as the most accurate and reliable is the information, the greater are the clients satisfied with the e-banking service. further, hypothesis h2 was also supported as security of e-banking services does significantly influence (β = 0.288, p < .05***) customer satisfaction. therefore, hypothesis h2 is supported as it is in tandem with previous studies such as belás et al. (2016), chen et al. (2012), farzianpour et al. (2014), novickytė and pedroja (2015), as well as ul haq and awan (2020). this finding illustrates that as more e-banking system is equipped with latest security of electronic networks, customers’ secure access to e-banking services will be enhanced, and the use of these services will be expanded. confidentiality of data and private information is necessary to protect them against abuse. using important security practices to protect critical customer information using modern banking methods can help the bank maintain confidential customer information. thus, the outcome proves that security difficulties presently impacting customer satisfaction have turned to a critical part of bank activities. finally, the association of user’s perceived usefulness and customer satisfaction shown by hypothesis h3 is positive and significant (β = 0.289, p < .05***), and so the hypothesis is supported. this finding is aligned with abu-assi et al.’s (2014), andrea et al.’s (2021), liébana-cabanillas et al.’s (2013), rawwash et al.’s (2020) and ugwuanyi et al.’s (2021) hamzah et al., asian finance & banking review 7(1) (2023), 1-9 7 study. this finding proves that if the e-banking system is useful and easy to use, and is able to help customers in achieving their banking objectives, customers’ satisfaction of the bank’ service would be invariably enhanced. a friendly user interface would help the bank achieve this because customers would prefer a system that is less complex and would not overload them with information that would stretch their cognitive state and disrupt their affective state. conclusions this study contributes to the growing empirical literature on the determinants of consumer satisfaction in the context of ebanking services by exploring the influence of reliability, security, and perceived usefulness on consumer satisfaction. using an empirical data among university students in malaysia, it can be concluded that the student segment of banking institutions’ customers in malaysia build their satisfaction based on the reliability, security, and dan perceived usefulness. these quality plays a very important role, as it has become the basis for how customers view e-banking and, eventually, how it interacts and behaves with online services. the determinants of e-banking service quality associated with the banking industry is found to be essential hence, banks should take care of all three factor in regard to sustain an elevated level of customer satisfaction. this shows that customers are more attracted to banks that allow faster transactions via online portals, which are easily available. in addition, customers lay more stress in the effectiveness of the website security system as they are concerned with the privacy of their personal information and the safety of their financial transactions while using ebanking. therefore, banks should ensure that customer’s personal information shared over e-banking platforms is not accessible to any third party. to enhance the security of the financial transactions, banks should provide secure and unique personal identification numbers and always send login and transaction alerts to registered contact numbers and e-mail addresses. banks should also send onetime usable passwords to customers via registered phone/e-mail to complete each transaction, thus preventing suspicious transactions. furthermore, greater emphasis should be placed on the physical (system, functions and interface) and psychological attributes (services, information, attitudes) in comprehending the changing aspects of virtual clients’ behavior as the finding suggests that customers perceived the usefulness of the system in continue their usage. this result is significant for the banking institution so that they should deliver their customers an effective website with an appropriate setting and upgraded technological development in order to deliver first-class condition of services. today, clients are provided with numerous different banking portals which can make them switch to other banks. hence, bank’s websites should focus more on improving their functionality and user interface and also make their online portals attractive. additionally, competition is high, their e-banking system should be designed with a fast-processing time for customer requests and issues in order to attract and retain customers of banks. it is recommended to make the app simple to use and user friendly while the services should be reliable and secure. even though this research provides fruitful insights, it faces some constraints as well. first, the data collected is from the university’s students only that showing similar lifestyles and more or less similar preferences. hence, future research is expected to expand the banking institutions’ customer segments as people belonging to different backgrounds, geographic regions, and demographics might exhibit variant stance and viewpoint towards e-banking service. additionally, future research is suggested to increase the number of variables to be studied because the three variables covered in study only contributes about 64.8% of the total variability in the customer satisfaction. perhaps, there are other variables that might influence customer satisfaction such as trust, technological speediness, compatibility, and any others. next, the selfreported behavior on which this study relied are vulnerable to response bias. there is an uncertainty regarding the accuracy of responses because self-reports of customer satisfaction may be less accurate. to reduce response bias, it is suggested for future research to use in-depth techniques applied to primary data sources such as interviews or observations. this might help researcher to explore certain aspects that cannot be discover using survey questionnaire. author contributions: conceptualization, h.h., n.n.a.n.m.s., h.h., s.a.b. and a.b.b.; methodology, h.h.; software, h.h.; validation, h.h.; formal analysis, h.h.; investigation, h.h. and a.b.b.; resources, h.h. and a.b.b.; data curation, h.h.; writing – original draft preparation, h.h., n.n.a.n.m.s., h.h., s.a.b. and a.b.b.; writing – review & editing, h.h. and a.b.b.; visualization, t h.h., n.n.a.n.m.s., h.h., s.a.b. and a.b.b.; supervision, a.b.b.; project administration, h.h.; funding acquisition, h.h., n.n.a.n.m.s., h.h., s.a.b. and a.b.b. authors have read and agreed to the published version of the manuscript. institutional review board statement: statement: ethical review and approval were waived for this study because the research does not deal with vulnerable groups or sensitive issues. funding: the authors received no direct funding for this research. acknowledgments: we would like to acknowledge everyone who played a role in our academic accomplishments especially the faculty of business and accountancy academic staff and the committee members, each of whom has provided patient advice and guidance throughout the research process. thank you all for your unwavering support. informed consent statement: informed consent was obtained from all subjects involved in the study. data availability statement: the data presented in this study are available on request from the corresponding author. the data are not publicly available due to restrictions. conflicts of interest: the authors declare no conflict of interest. references abu-assi, h. a., al-dmour, h. h., & zu'bi, m. f. 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(2020). e-banking and mobile banking effects on customer satisfaction. accounting, 6(6), 1117-1128. publisher’s note: cribfb stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2023 by the authors. licensee cribfb, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). asian finance & banking review (p-issn 2576-1161 e-issn 2576-1188) by cribfb is licensed under a creative commons attribution 4.0 international license. http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ copyright © cc-by-nc 2020, cribfb | asfbr asian finance & banking review; vol. 4, no. 1; 2020 issn 2576-1161 e-issn 2576-1188 published by centre for research on islamic banking & finance and business, usa 24 money supply and private sector funding in nigeria: a multi-variant study zaagha alexander sulaiman department of banking and finance rivers state university, port harcourt, nigeria e-mail: zaaghi75@gmail.com abstract this study examined the effect of money supply on private sector funding in nigeria. the purpose of the study was to examine the extent to which monetary policy affect private sector funding in nigeria. time series data was sourced from central bank of nigeria statistical bulletin from 1985-2018. credit to private sector, credit to core private sector and credit to small and medium scale enterprises sector was used as dependent variables while narrow money supply, broad money supply, large money supply, private sector demand deposit was used as independent variables. ordinary least square (ols), augmented dickey fuller test, johansen co-integration test, normalized co-integrating equations, parsimonious vector error correction model and pair-wise causality tests were used to conduct the investigations and analysis. the empirical findings revealed that money supply explains 82.1 percent variation on credit to core private sector, 85.2 percent and 23.4 percent of the variation in credit to private sector and credit to small and medium scale enterprises sector. the study conclude that money supply has significant relationship with credit to private sector, credit to core private sector and credit to small and medium scale enterprises sector. from the findings, the study recommends that central bank of nigeria should induce the variations of the amount of money changes through the nominal interest rates. that the monetary authorities should ensure adequate quantity of money supply that positively affect private sector funding in nigeria. keywords: money supply, private sector funding, private sector demand deposits, money supply, small and medium scale enterprises. 1. introduction there are four sectors of the economy as formulated in the nation’s income accounting model and shown in the circular flow of income and products. these are the government (public), private sector, the household and the external sector. the private sector plays significant role in every economy. it drives growth, create jobs and pay the taxes that finance services and investment. in nigeria the private sector generates 90 per cent of jobs, funds 60 per cent of all investments and provides more than 80 per cent of government revenues (somoye, and iio, 2009). the scale and diversity of the private sector operating in nigeria strongly influences overall financial flows into the economy (onoh, 2007). private investors’ investment strategy is based on maximizing risk-adjusted returns. the goal is not to invest in the highest returning asset, but rather to invest in well-compensated risks. to achieve the above through the private sector, government plays a central role in formulating financial policies that facilities easy access/source of capital. it needs to provide good policies and strong financial and institutional framework to ensure that private sector can thrive and the benefits of growth reach all citizens. the majority of constraints to growth identified by the private sector are directly linked to government policies and actions. government’s policy and legislative decisions determine private sector funding. private sector funding is determined by government monetary policy, financial sector reforms and direct funding from the government (sesay, and abdulai, 2017). the pro-cyclical relationship between monetary policies and private sector funding can be illustrated through the credit channel which states that monetary policy works by affecting bank assets (loans) as well as banks’ liabilities (deposits). the key point is that monetary policy besides shifting the supply of deposits also shifts the supply of bank loans. for instance, an expansionary monetary policy that increases bank reserves and bank deposits increase the quantity of bank loans available. where many borrowers are dependent on bank loans to finance their business activities, this increase in bank loans will cause a rise in investment (and also consumer) spending, leading ultimately to an increase in aggregate output. when monetary policy tightens, the reduction in available bank reserves forces banks to create fewer reservable deposits, banks must then either replace the lost reservable deposits with non-reservable liabilities, or shrink their assets, such as loans and securities, in order to keep total assets in line with the reduced volume of liabilities. the inadequacy of credit disbursement to small and medium scale businesses, firms, households and especially the very poor and the controversy surrounding the nature, direction and magnitude of relationship between private sector funding through copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 25 credit disbursement and poverty reduction/output growth within the monetary policy environment gave rise to the increasing desire for this investigation. it is observed that creating unhindered access to a wide range of credit services/products will not only enhances efficient financial intermediation prospect but will also significantly contribute to poverty reduction and output growth through the window of increased productivity, employment and enhance economic growth. the effect of monetary policy has well been examined; however, there are three strands of studies on the effect of monetary policy. the first strands focused on the effect of monetary policy on economic growth (adefeso and mobolaji, 2010; adofu, abula and audu, 2010; amassoma, nwosa and olaiya, 2011, nasko, 2016, karimo and ogbonna, 2017). the second strand focused on the effect of monetary policy on banking sector performance (alper and anbar, 2011; enyioko, 2012; okoye, and eze, 2013, udeh, 2015, ogolo and tamunotonye, 2019, ayub and seyed, 2016 and jegede, 2014) while the third strand focused on the effect of monetary policy and capital market performance (akani, 2017, lawal, et al. 2017, iddrisu, et. al 2017 and echekoba, 2018).these studies failed to establish the effect of monetary policy on private sector funding. from the above problems and knowledge gap, this study examined the effect of money supply on private sector funding in nigeria. 2. literature review money supply monetary policy refers to the specific/deliberate actions taken by the central bank to regulate the value, supply and cost of money in the economy with a view to achieving government’s macroeconomic objectives. the objectives of monetary policy vary amongst various countries. while the objective of monetary policy is predicated on achieving price stability in a country, other countries seeks to achieve price stability and other diverse macroeconomic objectives. the central bank of nigeria, like other central banks in developing countries, achieves the monetary policy objective via the volume of money supply. the total volume (stock) of money in circulation among the public at a particular point in time is called money supply. money supply is the entire stock of currency and other liquid instruments in circulation in an economy at a particular time. money supply can include cash, coins, and balances held in checking and savings account, and other near money substitutes. economists are of the view that an indebt analysis of money supply remains a key veritable instrument towards understanding macroeconomic paradigm and a tonic that guides macroeconomic policy. money supply is generally classified as m0, m1, m2 and m3, based on the type and size of the account in which the instrument is kept. for example, m0 and m1 are often referred to as narrow money and include coins and notes that are in circulation and other money equivalents that can be converted easily to cash. m2 includes m1 and, in addition, short-term time deposits in banks and other money market funds. m3 includes m2 in addition to long-term deposits. notably, the classifications differ amongst countries as each country may tend to use different classifications. money supply depicts the interplay of different types of liquidity each type of money has in the economy. the crux of money supply is that it shows the different level of liquidity or spendability. the effect of money supply on the economy is pertinent as increase in the supply (stock) of money will lowers interest rates, which in turn, will stem investment and enhance access to credit by private sector players, small and medium scale enterprises, consumers and firms, thereby stimulating investment spending. off-course, increase money supply that lowers interest rate will mean that businesses and individuals will increase consumption, increase production and investment drive and stem economic boom. the increased business activity raises the demand for labor. the reverse is the case if invariably money supply falls or when its growth rate declines. in nigeria, the central bank defines money supply as comprising narrow and broad money. the definition of narrow money (m1) includes currency in circulation with non-bank public and demand deposits or current accounts in the banks. the broad money (m2) includes narrow money plus savings and time deposits, as well as foreign denominated deposits. the broad money measures the total volume of money supply in the economy. thus, excess money supply (or liquidity) may arise in the economy when the amount of broad money is over and above the level of total output in the economy (cbn 2006). notably, the raising or high level of money supply presently remains pivotal to the regulatory authority and policy drivers and requires adequate steps aim at regulating and controlling it frequently. the form of money supply called m0 is defined as the non-bank sectors holdings of notes and coins. it is calculated by subtracting the notes and coins held by banks from the total quantity of risks bank notes and coins in circulation. nnnana (2003) stressed that the broad measure of money supply 1 and 2 includes m1 plus quasi money – i.e. the quantum of savings and time deposits of the public and private sectors with the banking system. an increase in the money supply is frequently assumed to positively affect stock prices and credit disbursement. when money stock grows, it stimulates the economy which leads to greater credit being available to firms and private sector to expand production, investment and then increases sale resulting in increased earnings for firms. this results in better dividend payments for firms leading to an increase in the price of stocks. however, money supply can also be negatively associated to stock prices. to copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 26 illustrate this argument, we first go through the link between money supply and inflation, since the expansion of the money supply is positively related to inflation in the economy which would increase the nominal risk free rate (fama, 1981). this increase in the nominal risk free rate will lead to a rise in the discount rate which leads to a fall in return. economists argue that inflation is a strictly a monetary phenomenon and occurs when the rate of growth of the money supply is higher than the growth rate of the economy (chimobi and igwe, 2010). the supply of bank money is inherently determined by banks in combination with their customers and owners. easily reproducible micro-and macroeconomic accounting shows that when firms or households take loans from banks new deposits are created, when loans are repaid these deposits are destroyed, the two claims cancel out. interest payments from non-banks to banks reduce aggregate deposits and increase bank equity by the same amount. banks dividends to non-banks or bank expenses towards non-banks reduce bank equity and increase aggregate deposits by the same amount. when banks purchase assets from non-banks deposits are created in same amount. there are only two necessary conditions for the previously stated conditions to hold, first, that non-bank cash holding does not increase, and second, that banks use central bank money for settlement, both are observable. le bourva (1992) stated there are two opposing views concerning the supply of bank money. on the one hand the quantity theorists and keynes believe the quantity to be fixed independently by the banking system, on the other, the banking school and wicksell believe that banks do not set a quantity but a price for money, interest rates. keynes in this respect regards to his views presented in his general theory, and not changing views expressed thereafter. how the banking school views the behavior of banks is an analogy to the described supply of central bank money, but much harder to prove since the banking system consists of many banks. noteworthy is that a central bank can force central bank money and bank money into the economy through quantitative easing even without the consent of banks. private sector funding the private sector is said to be the engine of economic growth for a country, especially, for developing economies (william et al. 2019). the private sector remains the nucleus that drives economic growth. private sector funding (credit) is no doubt a driver of the real economy, particularly in developing economies like nigeria where the financial markets are porous and near well developed to mobilize the needed resources to accelerate the desired level of economic development. the private sector is the part of the economy that is run by individuals and companies for profit and is not state controlled. therefore, it encompasses all for-profit businesses that are not owned or operated by the government. private sector funding entails the ways and means by which private firms and households (individuals) readily have access to fund to finance their investment and promote economic growth. it involves the pros and cons through which individuals and statutory firms’ gains access to the availability of credit (fund) to finance and promote their investment drive. private sector funding involves credit extended by the banking and financial institutions to the private sector of the economy alone and basically include firms and households excluding loans disbursed to the government. according to the global economic report (2019), domestic credit to private sector by banks refers to financial resources provided to the private sector by other depository corporations (deposit taking corporations except central banks), such as through loans, purchases of non-equity securities, and trade credits and other accounts receivable, that establish a claim for repayment. financial resources by way of credit extension are essential lubricants that oil the wheels upon which the economy strives. it enables the funding of new investments and allows individuals to buy houses, cars, and make other investment plans. though, excessive credit usually leads to financial crises as witness in the 2008 2009 global financial crises but, in essence, credit availability remains the hallmark for the promotion of investment and economic development. as a vital engine for economic growth in developing economies, the private sector relies on the financial sector as a source of funds in advancing growth (katusiime, 2018). according to global economy report, if the banking industry credit to the private sector is about 70 percent of gdp and more, then the country has a relatively well developed financial system. however, in developed and advanced economies the amount (rate) of credit to the private sector can hover above 200 percent of gdp. conversely, in some developing and poor countries (economies), the amount of credit disbursed to the private sector could be less than 15 percent of gdp. thus, private sector funding remains a financial bane in poor economies as this constitutes major challenges confronting private sector investment and economic growth. assefa (2014) opined that these countries, firms and households essentially do not have access to credit for investment and various purchases. the private sector represents the productive sector of the economy and should be fueled with sufficient funds so as to enhance the growth of the sector (abdullahi, 2014). funding small and medium scale enterprises sector in nigeria copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 27 in nigeria, the national policy on micro, small and medium enterprises define smes along the lines of international criteria. the policy mainly uses the employment base and asset size to categorize firms into micro, small and medium. accordingly, for smallscale enterprises, the employment base should be between 10 and 49 with an asset base of over n5 million but less than n50 million. medium scale enterprises are those that employ between 50 and 199 workers, with an asset base of over n50 million but less than n500 million. importantly, the assets admitted for these classifications exclude land and buildings. also, in case of conflict of classification between employment and asset size, the policy gives pre-eminence to the number of employees over asset size. bank credit refers to loans, advances and discounts of specific sums, which are normally with terms and other conditions available to individuals, small and medium sized business to start, grow or sustain any economic activity (john and onwubiko, 2013). a widespread concern is that, the deposit money banks attitude towards the subsector; which supposed to be the major source of funding to small and medium sized businesses are not providing enough aids and therefore limiting the potentials that could be taped from the subsector. the deposit money banks in their mode of operations most of the time call for more sure form of financial security, if they are to grant credit facility to small or medium sized business that need funds for business activities. however, due to the nature of small and medium sized businesses, in most cases, they tend not meeting up the requirements for the granting of the facilities. this has become a major challenge to the small and medium sized business operations in nigeria. robinson and victor (2015) assert that most smes growth was hindered as a result of inability to access fund from financial institutions. theoretical review money view the theory commonly tag money view is predicated on the notion that reductions in the volume of outside money will cause the real rates of return; this in turn reduces investment because fewer profitable projects are available at higher required rates of return (cecchetti, 1995). this is a movement along a fixed marginal efficiency of investment schedule. (cecchetti, 1995) opine that the less substitutable outside money is for other assets the larger the interest rate changes. in fact, there is no reason to distinguish any of the “other” assets in investors’ portfolios. in terms of the simple portfolio model, the money view implies that the shift in assets prices for all of the assets excluding outside money are equal. major implication of this traditional model of monetary policy transmission centers on the incidence of decline in investment. since there are no externalities or market imperfections, it is only the least socially productive projects that go unfunded. the loanable funds theory the neo-classical or the loanable fund theory examines interest rate in terms of demand and supply of loanble funds or credit. according to this theory, the rate of interest is the price of credit which is determined by the demand and supply for lonable funds. in the words of prof lerner in jhingan (1992); it is the price which equates the supply of credit, or saving plus the net increase in the amount of money in a period, to the demand for credit, or investment plus net hoarding in the period. the demand for loanble fund has primarily three source; government, businessmen and consumers who need them for purpose of investment, hoarding and consumption. the government borrows funds for constructing public works or for war preparations. the businessmen borrow for the purpose of capital goods and for starting investment projects. such borrowings are interest elastic and depend mostly on the expected rate of profit as compared with the interest rates. the demand of loanable fund on the part of consumers is for the purchase of durable consumer goods like scooters, houses etc. individual borrowings are also interest elastic. the tendency to borrow is more at a lower rate of interest than at a higher rate. loanable funds theory of interest rate determination views the level of interest in the financial market as resulting from the factors that affect the supply and demand of loanable funds (saunders 2010). interest rate in this theory is determined just like the demand and supply of goods is determined, supply of loanable funds increases as interest increases, other factors held constant. he goes further to explain that the demand for loanable funds is higher as interest rate fall, other factors held constant. saunders (2010) identifies two factors among others causing demand curve for loanable funds to shift; economic conditions and the monetary expansion refers to the sum of money offered for lending and demanded by consumers and investors during a given period. the interest rate model is determined by the interaction between potential borrowers and potential savers. credit rationing theory access to credit is explained by credit rationing theory (stiglitz and weiss, 1981; bester, 1985; cressy, 1996; baltensperger and devinney, 1985). according to stiglitz and weiss (1981) credit rationing is said to occur when some borrowers receive a loan, while others do not. credit rationing takes place at either financier level due to loan markets imperfection and information asymmetry or voluntarily by the borrowers (voluntary exclusion). at financier level, credit rationing occurs in a situation where demand for credit exceeds supply at the prevailing interest rate (stiglitz and weiss, 1981). there is scant literature on selfrationing, however, in situations where credit rationing is voluntary, arora (2014) describes such borrowers as non-credit seekers due to personal, culture or social reasons or could be in the bracket of discouraged borrowers. bester (1985) suggested that copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 28 financiers may choose to reject some borrowers because of negative enticement effects. for example, for given collateral, an increase in the rate of interest causes adverse selection, since only borrowers with riskier investments will apply for a loan at a higher interest rate. similarly, higher interest payments create an incentive for investors to choose projects with a higher probability of bankruptcy (afonso and aubyn, 1997, 1998; matthews and thompson, 2014). on the other hand, for a fixed rate of interest, an increase in collateral requirements may also result in a decline in the lender’s profits (cressy, 1996). stiglitz and weiss (1981) showed that this happens if the more risk-averse borrowers, those that choose relatively safe investment projects, drop out of the market. according to bester (1985) andretti (1983), if financiers set collateral requirements and the rate of interest to screen investors' riskiness, then no credit rationing will occur at equilibrium. this is because increasing collateral requirements tends to result in adverse selection, even with risk-neutral investors (bester, 1984a, 1985). empirical review suleyman (2013) examined the monetary policies of the central bank of the republic of turkey on smes credit between 20032011. autoregressive moving average (arma) test and var estimation models were use. results show that money supply has a strong effect for manufacturing sector credit volume. also, result shows that increase in the credit volume of large enterprises does not have any effect on the credit volume for smes. on the contrary, as credit volume of smes increases, credit volume of large enterprises decreases, which reveals a reverse causality between credit volume tendencies of different size firms. olukayode and somoye, (2013) evaluates the impact of finance on entrepreneurship growth in nigeria using endogenous growth framework, the results showed that finance and interest rate, significantly impacted on entrepreneurship in nigeria. they argued that the formulation of effective macroeconomic policy targeted to entrepreneurship financing and growth is necessary and also, monetary authorities should intervene indirectly by reducing monetary policy rates (mpr) which will directly reduce the transaction costs of funds to industrial sectors. tsenkwo and longdu’ut (2013) examined the relationship between monetary policy rate (mpr) and banking rates: evidence from regression and multivariate causality analysis. the study used descriptive statistics and econometrics analysis to subject the raw data from secondary source to series of refining like unit root test, ordinary least square test, stability test, and granger causality test. these tests were conducted, using granger causality test, to know the direction of their relationships and how they are caused. the finding revealed that almost all the variables, with the exception of bank savings rate, exhibit a strong sign of co-moving in the long run with the tendency of converging. the research revealed that there exists unidirectional causality between monetary policy rate and bank lending rate; bank lending rate and bank savings rate. and there exist a bi-directional causality between monetary policy rate and bank savings rate. otalu, aladesanmi and mary (2014) assessed the impact of monetary policy on the deposit money banks performance in nigeria, and in their study, the interest rate and money supply, liquidity ratio and the cash reserve ratio were used as proxy for monetary policy. the study used regression analysis to examine the relationship between monetary policy and bank performance in nigeria. the results of the diagnostic test showed that credit creation of commercial banks is significantly being influenced by the interest rate, money supply, liquidity ratio and the cash reserve. precisely, money supply and cash reserve ratio appeared to have statistically influenced deposit money banks’ credit creation. jegede (2014) empirically examined the effect of monetary policy on commercial bank lending in nigeria between 1988 and 2008, using macroeconomic time series variables of exchange rate, interest rate, liquidity ratio, money supply, and commercial bank loan and advances. the study employs vector error correction mechanism of ordinary least square econometric technique as the estimation method. findings indicate that there exists a long run relationship among the variables in the model. the study specifically revealed that exchange rate and interest rate significantly influenced commercial banks’ lending, while liquidity ratio and money supply exert negative effect on commercial banks’ loan and advances. the study concludes that monetary policy instruments are not effective to stimulate commercial bank loans and advances in the long-run, while banks’ total credit is more responsive to cash reserve ratio and recommends that monetary authority should make efforts to develop indirect monetary instruments and exercise appropriate control over the monetary sector. imoughele and ismaila (2014) employed co-integration and error correction modelling (ecm) techniques to investigate the impact of commercial bank credit on nigeria's smes between 1986 and 2012.the results revealed that smes and selected macroeconomic variables included in the model have a long run relationship with smes output. the study also reveals that savings time deposit and exchange rate have significant impact on smes output in nigeria. the study also showed that interest rate has adverse effect on smes output. copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 29 ayub and seyed (2016) in their study examine the relationship existing between monetary policy and bank lending behavior and the influence of bank specific features on this relationship in the banks listed on the 8 tehran stock exchange. the study used iran’s bank loan aggregated series and bank’s size and capital structure data. the study used the growth rate of m2 as the indicators of irans’ monetary policy. using vector error correction model (vecm) and quarterly data for the period 2007: q1 to 2014: q4. the results showed a bidirectional causal link between m2 and banks’ lending behavior trading on the tehran stock exchange. it was also observed that the banks' capital structure as one of the banks specific feature variables have a negative impact on bank lending behavior in accepted banks in tehran stock exchange. sesay and abdulai (2017) empirically investigate monetary policy effects on private sector investment in sierra leone. the study examines the rate at which changes in monetary policy in sierra leone has affected the behavior of private sector investments, theories and empirical studies are reviewed in a way to identify a suitable model for private sector investment for the period 1980-2014 using recent econometric techniques (ols, vecm, var). results of the findings suggest that money supply and gross domestic saving exert positive and statistically significant effect on private sector investments whereas treasury bill rate, inflation and gross domestic debt exert a negative effect. an important policy implication emerging from this study is to facilitate the establishment of financial institutions to increase credit delivery to the private sector so as to enhance private investment. echekoba and ubesie (2018) did an assessment of financial deepening on the growth of nigerian -economy 1990-2016 using ordinary least square regression (ols). the main objective of this study is to evaluate the effect of private sector credit, money supply and market capitalization on economic growth in nigeria. findings showed that the three independent variables of the study all have significant effect on nigerian financial deepening. it was therefore recommended that policies aimed to reduce the high incidence of non performing credits to ensure that private sector credits are channel to the real sector of the economy. the monetary authorities should implement policies that increase the flow of investible funds and improves the capacity of banks to extend credit to the economy as this will make broad money supply and private sector, to significantly impact on economic growth in nigeria. adeniyi et al. (2018) investigated the relationship that exists between monetary policy instruments and deposit money banks loans and advances in nigeria. annual time series data covering a period from 1981-2016 were used and the toda and yamamoto granger non-causality model was employ to examine the relationship existing between deposit money banks loan and advances and monetary policy variables in nigeria. findings revealed that structural changes in monetary policy system exerted positive significant impact on loan and advances of deposit money banks in nigeria. findings also revealed bidirectional relationship existing between mpr and loan and advances of deposit money banks in nigeria. precisely, mpr proved to be a significant variable which causes deposit money bank loans and advances in nigeria. other explanatory variables (broad money supply, liquidity ratio, inflation rate and cash reserve ratio does not granger cause loan and advances of deposit money banks in nigeria within the study period. it concluded that the structural change in monetary policy system and monetary policy rate have significant impact on loan and advances of deposit money banks in nigeria. hence, the study recommended that monetary authority should formulate policies that will stabilize interest rate so as to boost the investors’ confidence. ogolo & tamunotonye (2018) empirically examined the effects of monetary policy on commercial banks’ lending to the real sector from 1981 – 2014 using multiple regression models aided by software package for social sciences. the study modeled commercial banks credit to agricultural and manufacturing sector as the function of interest rate, monetary policy rate, treasury bill rate, exchange rate, broad money supply and liquidity ratio. the regression results from model one found that interest rate, monetary policy rate have positive relationship with commercial banks’ lending to the agricultural sector while treasury bill rate, exchange rate, broad money supply and liquidity ratio have negative effect on the dependent variable. model two found that interest rate, treasury bill rate, exchange rate, broad money supply and liquidity ratio have negative effect on commercial banks’ lending the manufacturing sector while monetary policy rate have positive relationship with the dependent variable. they recommend that monetary policy should be harmonized with bank lending objectives to enhance commercial banks’ lending to the real sector of the economy. commercial banks should develop policies of managing the negative effect of monetary policy variables on its lending. william, zehou, and hazimi (2019) investigated the factors that influence domestic credit to the private sector in ghana. the study uses the johansen cointegration and vector auto-regression model to analyze panel data spanning the period from 1961 to 2016. findings from the study revealed that though there is no long-run association among the variables, there exist significant short-run relationship between domestic credit to the private sector, broad money and gross capital formation. further diagnostic tests showed that gross capital formation granger causes both domestic credit to the private sector and broad money, and domestic credit to the private sector granger-causes broad money. they concluded that money supply and gross capital copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 30 formation are necessary factors to address in the quest for developing the financial strength of domestic banks in providing credit facilities to the private sector for economic growth. olorunmade, samuel, and adewole (2019) examined the determinant of private sector credit and its implication on economic growth in nigeria. the fluctuation in the supply of money and credit is the basic causal factor at work in cyclical process; when money supply falls, prices decrease, profit decrease, production activities become sluggish and production falls and when money supply expands, price rise, profit increase and the total output increases and finally growth takes place. sample regression analyses were used to analyse data obtained from central bank of nigeria statistical bulletin from 2000 to 2017. it was revealed in the determinant of credit supply that there was significant relationship between total credits to private sec tor and money supply in nigeria. the study also finds that there was significant relationship between private sector credit and economic growth in nigeria. they recommend that there should be persistence increase of money supply to nigerian economy in order to increase the flow of credit to the real sector of the nigerian economy, financial institutions should distribute more credit to the real sector for productive purposes in order to increase gross domestic product. literature gap sesay and abdulai (2018) examined the rate at which changes in monetary policy in sierra leone has affected the behavior of private sector investments, theories and empirical studies are reviewed in a way to identify a suitable model for private sector investment for the period 1980-2014. gap and focus of present study: the above study is a foreign study and does not capture the effect of monetary policy on private sector funding, further the study only examined how monetary policy affect bank behavior of private investment. the present study will be carried out in nigeria and focus on the effect of money supply on private sector funding in nigeria. william, zehou, and hazimi (2019) investigate the factors that influence domestic credit to the private sector in ghana. the study uses the johansen cointegration and vector auto-regression model to analyze panel data spanning the period from 1961 to 2016. gap and focus of present study: the above study is a foreign study and does not capture the effect of money supply on private sector funding. furthermore, the study only examines the relationship between domestic credit to the private sector, broad money and gross capital formation. the present study will be carried out in nigeria and focus on the effect of money supply on private sector funding in nigeria. 3. methodology this study used ex-post facto quasi-experimental research design to examine the effect of money supply on private sector funding in nigeria. this study employed secondary data sourced mainly from the central bank of nigeria (cbn) statistical bulletin. model specification the study models are specified below: cps = α + β1m1 + β2m2 + β3m3 + β4psdd + et 1 ccps = α + β1m1 + β2m2 + β3m3 + β4psdd + et 2 smes = α + β1m1 + β2m2 + β3m3 + β4psdd + et 3 where: cps = credit to the private sector ccps = core credit to the private sector csmes = credit to small and medium scale enterprises sector m1 = narrow money supply m2 = broad money supply m3 = large money supply psdd = private sector demand deposit et = error term techniques of data analysis the main tool of analysis is the ordinary least squares (ols) using the multiple regression method for a period of 34 years, annual data covering 1985– 2018. statistical evaluation of the global utility of the analytical model, so as to determine the reliability of the results obtained were carried out using the coefficient of correlation (r) of the regression, the coefficient of determination (r2), the student t-test and f-test. copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 31 (i) coefficient of determination (r2) test: this measure the explanatory power of the independent variables on the dependent variables. r2 gives the proportion or percentage of the total variation in the dependent variable y that is accounted for by the single explanatory variable x. the higher the r2 value the better. for example, to determine the proportion of monetary policy to private sector funding in our model, we used the coefficient of determination. the coefficient of determination varies between 0.0 and 1.0. a coefficient of determination says 0.20 means that 20% of changes in the dependent variable are explained by the independent variable(s). therefore, we shall use the r2 to determine the extent to which variation in monetary policy variables are explained by variations in private sector funding variables over the periods covered in this study. (ii) correlation co-efficient (r): this measures the degree of the relationship between two variables x and y in a regression equation. that is, it tries to establish the nature and magnitude of the relationship when two variables are been analyzed. thus correlation co-efficient show whether two variables are positively or negatively correlated. that is, it takes the value ranging from – 1, to + 1. (iii) f-test: this measures the overall significance. the extent to which the statistic of the coefficient of determination is statistically significant is measured by the f-test. the f-test can be done using the f-statistic or by the probability estimate. we use the f-statistic estimate for this analysis. (iv) student t-test: measures the individual statistical significance of the estimated independent variables. this is a test of significance used to test the significance of regression coefficients (gujurati, 2003). generally speaking, the test of significance approach is one of the methods used to test statistical hypothesis. a test of significance is a procedure by sample results are used to verify the truth or falsity of a null hypothesis (ho) at 5% level of significance. (v) durbin watson statistics: this measures the collinearity and autocorrelation between the variables in the time series. it is expected that a ratio of close to 2.00 is not auto correlated while ratio above 2.00 assumed the presence of autocorrelation. (vi) regression coefficient: this measures the extent in which the independent variables affect the dependent variables in the study. (vii) probability ratio: it measures also the extent in which the independent variables can explain change to the dependent variables given a percentage level of significant. stationarity (unit root) tests stationary test therefore checks for the stationarity of the variables used in the models. if stationary at level, then it is integrated of order zero i.e. 1(0). thus, test for stationarity is also called test for integration. it is also called unit root test. stationarity denotes the non-existence of unit root. we shall therefore subject all the variables to unit root test using the augmented dickey fuller (adf) test specified in gujarati (2004) as follows. etyiyy t m i tt ++++= − − − 1 1 121  4 where: ty = change time t 1− ty = the lagged value of the dependent variables t = white noise error term if in the above  =0, then we conclude that there is a unit root. otherwise there is no unit root, meaning that it is stationary. the choice of lag will be determined by akaike information criteria. co-integration test (the johansen' test) copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 32 it has already been warned that the regression of a non-stationary time series on another non stationary time series may lead to a spurious regression. if the residual is found to be stationary at level, we conclude that the variables are co-integrated and as such has long-run relationship exists among them. tijt j i iit i i tot cpscpswcps 1 11  +++= − = − =  5 tijt j i iit i i tot ccpsccpswccps 1 11  +++= − = − =  6 tijt j i iit i i tot smessmeswsmes 1 11  +++= − = − =  7 granger causality test causality means the impact of one variable on another, in other-words; causality is when an independent variable causes changes in a dependent variable. the pair-wise granger causality test is mathematically expressed as: 111 1 11 1 uxyxy t x n i t y n i ot ++ − = − =   8 and 1 v 1y xxdp1 n 1i 1yt y 1 dp n 1i o dp t x + −  = − = + 9 where xt and yt are the variables to be tested white ut and vt are the white noise disturbance terms. the null hypothesis 011 == yy dp , for all i’s is tested against the alternative hypothesis 01 x and .01 ydp if the co-efficient of x 1 are statistically significant but that of ydp1 are not, then x causes y. if the reverse is true then y causes x. however, where both coefficient of x 1 and ydp1 are significant then causality is bi – directional. vector error correction (vec) technique the presence of co-integrating relationship forms the basis of the use of vector error correction model. e-views econometric software used for data analysis, implement vector auto-regression (var)based co-integration tests using the methodology developed by johansen (1991,1995). the non-standard critical values are taken from (osterward, 1992). 4. results and discussion of findings table 1: short term regression results money supply and credit to private sector money supply and credit to core private sector variable coefficient t-test prob. variable coefficient t-test prob. m2 0.000729 1.141947 0.2628 m2 0.000753 1.060002 0.2979 m3 -0.000298 -1.400662 0.1719 m3 -0.000538 -2.273573 0.0306 mi 0.001500 0.375437 0.7101 mi 0.002805 0.630556 0.5333 psdd -0.001213 -0.281657 0.7802 psdd -0.002128 -0.443908 0.6604 c 7.201741 10.96838 0.0000 c 7.289496 9.973294 0.0000 r2 0.852010 r2 0.821964 adj r2 0.831598 adj r2 0.797407 f-stat 41.73995 f-stat 33.47208 f-prob 0.000000 f-prob 0.000000 dw 0.731266 dw 0.826918 source: extract from e-view 9.0 the regression result on the two sectors have high r-square indicating 85.2 percent variation on credit to private sector and 82.1 percent variation on credit to core private sector. the models are statistically significant by the value of f-statistics and probability. copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 33 the coefficient of the variables shows that m2 and m1 have positive effect on credit to private sector and credit to core private sector while m3 and private sector demand deposit have negative effect on the dependent variables. table 2: unit root test money supply and credit to private sector money supply and credit to core private sector money supply and credit to core private sector variable adf 5% prob. variable adf 5% prob. cps -6.020482 -2.967767 0.0000 ccps -9.705692 -2.960411 0.0000 m2 -14.14646 -2.960411 0.0000 m2 5.025161 -2.621007 0.0000 m3 -6.804960 -2.963972 0.0000 m3 -6.804960 -2.963972 0.0000 m1 -5.634717 -2.986225 0.0001 m1 -5.634717 -2.986225 0.0000 psdd -5.455320 -2.986225 0.0002 psdd 5.455320 -2.986225 0.0000 source: extract from e-view 9.0 the time series properties of the variables used in the analysis was investigated using augmented dickey-fuller test. the test was run with specification of trend and intercept in the model. the adf statistics for the test are presented in the table 2 above. it can be seen from the table above that the unit root test results, using the adf unit root test suggest that all series are i (1) because they become stationary after being differenced once. therefore, the engle and granger (1987) can be employed. table 3: cointegration test hypothesized no. of ce(s) eigenvalue trace statistic 0.05 critical value prob.** hypothesized no. of ce(s) eigenvalue trace statistic 0.05 critical value prob .** money supply and credit to private sector money supply and credit to core private sector none * 0.977828 212.134 2 69.8188 9 0.0000 none * 0.979759 232.080 1 69.81889 0.0000 at most 1 * 0.782885 90.2493 0 47.8561 3 0.0000 at most 1 * 0.810103 107.278 5 47.85613 0.0000 at most 2 * 0.455343 41.3747 6 29.7970 7 0.0015 at most 2 * 0.601650 54.1177 7 29.79707 0.0000 at most 3 * 0.332401 21.9316 0 15.4947 1 0.0047 at most 3 * 0.457598 24.6641 9 15.49471 0.0016 at most 4 * 0.245195 9.00146 1 3.84146 6 0.0027 at most 4 * 0.147011 5.08827 4 3.841466 0.0241 source: extract from e-view 9.0 from table 3, the results of the johansen co-integration test show that we adopt the alternate hypothesis of four co-integrating equations at the 5% level of significance. this implies that, there is linear combination of the variables that are stationary in the long run and also confirms the existence of a long-run relationship between money supply variables and credit to private sector and credit to core private sector. table 4: error correction model money supply and credit to private sector money supply and credit to core private sector variable coefficient t-test prob. variable coefficient t-test prob. c 0.103264 0.206326 0.8397 c 0.011006 0.022741 0.9822 d(cps(-1)) 0.970388 2.208733 0.0458 d(ccps(-1)) 1.056725 2.963148 0.0110 d(cps(-2)) 0.583686 1.681936 0.1164 d(ccps(-2)) 0.806126 2.114837 0.0543 d(cps(-3)) 0.450984 1.492833 0.1593 d(ccps(-3)) 0.828710 2.233214 0.0437 d(m2(-1)) 0.002332 1.923614 0.0766 d(m2(-1)) 0.003711 2.512611 0.0260 d(m2(-2)) -0.001110 -1.176311 0.2606 d(m2(-2)) -0.001354 -1.581128 0.1379 b d(m2(-3)) -0.004425 -2.089293 0.0569 d(m2(-3)) -0.004596 -2.065428 0.0594 d(m3(-1)) 0.000771 1.602640 0.1330 d(m3(-1)) 0.000585 1.121600 0.2823 d(m3(-2)) 0.001049 1.627066 0.1277 d(m3(-2)) 0.002438 3.350254 0.0052 d(m3(-3)) 0.001307 3.425904 0.0045 d(m3(-3)) 0.001227 2.700478 0.0182 d(mi(-1)) -0.000529 -0.044607 0.9651 d(mi(-1)) 0.006965 0.618165 0.5471 d(mi(-2)) -0.036868 -2.403970 0.0318 d(mi(-2)) -0.038119 -2.688275 0.0186 copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 34 d(mi(-3)) 0.019887 1.740477 0.1054 d(mi(-3)) 0.021494 2.041020 0.0621 d(psdd(-1)) -0.002181 -0.166101 0.8706 d(psdd(-1)) -0.013800 -1.154855 0.2689 d(psdd(-2)) 0.038496 2.274134 0.0406 d(psdd(-2)) 0.040595 2.595134 0.0222 d(psdd(-3)) -0.017678 -1.329483 0.2065 d(psdd(-3)) -0.025661 -2.037529 0.0625 ecm(-1) -1.717053 -3.714111 0.0026 ecm(-1) -1.672063 -4.105179 0.0012 r2 0.791987 r2 0.844319 adj r2 0.535971 adj r2 0.652713 f-stat 3.093507 f-stat 4.406521 f-prob 0.022942 f-prob 0.005035 dw 1.756215 dw 1.923447 source: extract from e-view 9.0 it is important to note that the corresponding sign of error correction term (ect) is negative but significant. this means that there is a long run causality running from independent variables to the dependent variable. the negative sign of (ect) indicates a move back towards equilibrium following a shock to the system in the previous year. the r2 from models proved that the variables can explain 79.1 and 84.4 percent changes on the dependent variables. the models are statistically significant from the value of f-statistics and probability. however, the ecm coefficient indicates that the models can adjust at the speed of 171 and 167 percent annually. the coefficient of the variables defines the effect of the independent variables on the dependent variables at various lags. table 5: granger causality test null hypothesis obs fstatistic prob. null hypothesis obs f-statistic prob. money supply and credit to private sector money supply and credit to core private sector m2 does not granger cause cps 32 4.0679 8 0.0286 m2 does not granger cause ccps 32 0.7868 5 0.4654 cps does not granger cause m2 32 0.1997 3 0.8202 ccps does not granger cause m2 32 4.1493 8 0.0268 m3 does not granger cause cps 32 0.6526 5 0.5287 m3 does not granger cause ccps 32 8.1663 9 0.0017 cps does not granger cause m3 21.271 4 3.e-06 ccps does not granger cause m3 32 17.149 5 2.e-05 mi does not granger cause cps 32 2.1730 3 0.1333 mi does not granger cause ccps 32 0.8891 5 0.4227 cps does not granger cause mi 0.3650 1 0.6976 ccps does not granger cause mi 32 0.1546 6 0.8575 psdd does not granger cause cps 1.9697 0 0.1590 psdd does not granger cause ccps 32 0.9314 8 0.4063 cps does not granger cause psdd 0.8096 4 0.4555 ccps does not granger cause psdd 32 0.2103 5 0.8116 source: extract from e-view 9.0 pair wise causality tests were run on the models with an optimal lag of 2. the results are presented in table 5 above. the researcher’s interest here is to establish the direction of causality between the dependent variables and the independent variables from 19852018. in the models there is uni-directional causality from broad money supply to credit to private sector and unidirectional causality from credit to core private sector to broad money supply and from m3 to credit to core private sector. copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 35 table 6: short term regression results money supply and credit to small and medium scale enterprises money supply and credit to small and medium scale enterprises sector variable coefficient t-test prob. psdd -0.001888 -0.146513 0.8846 m1 0.001038 0.087725 0.9307 m3 0.000601 0.963978 0.3433 m2 -0.000860 -0.456413 0.6516 c 8.035331 4.167254 0.0003 r2 0.234860 adj r2 0.125554 f-stat 2.148652 f-prob 0.101072 dw 0.792969 source: extract from e-view 9.0 to find out how well the model fits a set of observations, the r2 indicates that 23.4 percent of the variation in money supply to credit to small and medium scale enterprises sector is explained within the model. nonetheless, the r2 cannot determine whether the coefficient estimates and predictions are biased, hence further assessment of the residuals is necessary. from the results it could be deduced that m2 and private sector demand deposit (psdd) have negative effect on credit to small and medium scale enterprises sector while m1 and m3 have positive effect on credit to small and medium scale enterprises sector in nigeria. table 7: unit root test money supply and credit to small and medium scale enterprises money supply and credit to smes variable adf 5% prob. smes -5.921945 -2.976263 0.0000 m2 5.025161 -2.954021 0.0000 m3 -6.804960 -2.963972 0.0000 m1 -7.235884 -2.986225 0.0001 psdd -5.455320 -2.986225 0.0000 source: extract from e-view 9.0 the time series properties of the variables used in the analysis was investigated using augmented dickey-fuller test. the test was run with specification of trend and intercept in the model. the adf statistics for the test are presented in table 7 above. it can be seen from the table above that the unit root test results, using the adf unit root test suggest that all series are stationary at order i(1) because they become stationary after being differenced once. therefore, the engle and granger (1987) can be employed. table 8: cointegration test hypothesized no. of ce(s) eigenvalue trace statistic 0.05 critical value prob.** money supply and credit to smes none * 0.986093 192.7224 69.81889 0.0000 at most 1* 0.712074 64.46241 47.85613 0.0007 at most 2 0.490986 27.11087 29.79707 0.0989 at most 3 0.000693 0.202187 15.49471 0.5949 at most 4 0.002532 0.076056 3.841466 0.7827 source: extract from e-view 9.0 copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 36 from table 8, the results of the johansen co-integration test show that we adopt the alternate hypothesis of three co-integrating equations at the 5% level of significance. this implies that, there is linear combination of the variables that are stationary in the long run and also confirms the existence of a long-run relationship between money supply variables and credit to small and medium scale enterprises sector. table 9: error correction model furthermore, the corresponding sign of error correction term (ect) is negative but not significant. this means that there is a long run causality running from independent variables to the dependent variable. the negative sign of (ect) indicates a move back towards equilibrium following a shock to the system in the previous year. the r2 from model 3 in table 9 above proved that the independent variables can explain 62.5 percent changes on the dependent variables. the models are statistically significant from the value of f-statistics and probability. however, the ecm coefficient indicates that the models can adjust at the speed of 42.4 percent annually. the coefficient of the variables defines the effect of the independent variables on the dependent variables at various lags. money supply and credit to smes variable coefficient t-test prob. c 2.697326 0.877753 0.3988 d(smes(-1)) -0.092164 -0.265953 0.7952 d(smes(-2)) -0.064598 -0.199608 0.8454 d(smes(-3)) -0.054213 0.185505 0.8562 d(psdd(-1)) 0.055488 0.513111 0.6180 d(psdd(-2)) -0.038363 -0.319586 0.7553 d(psdd(-3)) 0.104251 0.748408 0.4699 d(m1(-1)) -0.056087 -0.552928 0.5914 d(m1(-2)) 0.040457 0.353998 0.7300 d(m1(-3)) -0.095419 -0.772243 0.4562 d(m3(-1)) -0.002449 -0.557153 0.5886 d(m3(-2)) 0.000104 0.044017 0.9657 d(m3(-3)) 0.000682 0.356550 0.7282 d(m2(-1)) -0.001067 -0.166555 0.8707 d(m2(-2)) 0.006089 0.646836 0.5310 d(m2(-3)) -0.001169 -0.057870 0.9549 ecm(-1) -0.424263 -1.323800 0.2124 r2 0.625345 adj r2 0.455970 f-stat 4.331540 f-prob 0.007725 dw 2.123434 copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 37 table 10: granger causality test source: extract from e-view pair wise causality tests were run on the models with an optimal lag of 2. the results are presented in table 10 above. the researcher’s interest here is to establish the direction of causality between the dependent variables and the independent variables from 1985-2018. there is no causality among the variables. 5. discussion of findings model i examined the relationship between money supply and credit to the private sector in nigeria. the estimated regression model from result of the vector error correction result in table 4 shows that the relationship between money supply and credit to private sector is high and significant. this is because of an r2 of 0.791987 meaning that the model explains approximately 79 percent of the total variations in the credit to the private sector. the error correction model shows a negative value of -1.717053 which is appropriate and is significant. this means that 171 percent of the deviation from long run equilibrium relationship in the credit to private sector is corrected every year since credit to private sector is estimated annually. some of the values of the coefficient of independent variables, that is money supply are positive and also proved negative at various lags. furthermore, it was found that the result of the error correction in table 4.9, the f*cal = 3.093507 > f*tab = 2.24 at 5% n=31 is statistically significant which is supported with a probability value of 0.0022942< 0.05 at 5% is significant, we therefore reject the null hypothesis, that is β1-β4 (money supply) is statistically significant with credit to private sector in nigeria. findings from the study corroborates findings from olorunmade, et al (2019) that there is significant relationship between total credits to private sector and money supply in nigeria. the implication is that there is enough money supply that enhance the disbursement of credit to the real sector. otalu, aladesanmi and mary (2014) opine that money supply and cash reserve ratio appeared to have statistically significant influenced deposit money banks’ credit creation. akani (2017) noted that if banks set interest rates too high, they may induce adverse selection problems because high-risk borrowers are willing to accept these high rates. the findings of this study is supported by keynesian liquidity preference theory as it could be used to determines the interest rate by the demand for and supply of money which is a stock theory. it emphasizes that the rate of interest is purely a monetary phenomenon. it further validates loanable funds theory which is a flow theory that determines the interest rate by the demand for and supply of loanable funds. findings also confirm bank lending of monetary policy transmission. mishkin (1995) argued that to be successful in conducting monetary policy, the monetary authorities must have an accurate assessment of the timing and effect of their policies on the economy, thus requiring an understanding of the mechanism through which monetary policy affects the economy. the bank lending channel represents the credit view of this mechanism. according to this view, monetary policy works by affecting bank assets (loans) as well as banks’ liabilities (deposits). the key point is that monetary policy besides shifting the supply of deposits also shifts the supply of bank loans. for instance, an expansionary monetary policy that increases bank reserves and bank deposits increase the quantity of bank loans available. where many borrowers are dependent on bank loans to finance their activities, this increase in bank loans will cause a rise in investment (and also consumer) spending, leading ultimately to an increase in aggregate output, (y). the schematic presentation of the resulting monetary policy effects is given by the following: m ↑ → bank deposits ↑ → bank loans ↑ →i ↑ → y ↑ (note: m= indicates an expansionary monetary policy leading to an increase in bank deposits and bank loans, thereby raising the level of aggregate investment spending, i, and aggregate demand and output, y,). in this context, the crucial response of banks to monetary policy is their lending response and not their role as deposit creators. the two key conditions necessary for a lending channel to operate are: (a) banks cannot shield their loan portfolios from changes in monetary policy; and (b) borrowers null hypothesis obs f-statistic prob. money supply and credit to smes psdd does not granger cause smes 32 0.87193 0.4305 smes does not granger cause psdd 32 0.03088 0.9696 m1 does not granger cause smes 32 0.94385 0.4026 smes does not granger cause m1 0.01320 0.9869 m3 does not granger cause smes 32 0.37423 0.6916 smes does not granger cause m3 0.53915 0.5899 m2 does not granger cause smes 0.87246 0.4303 smes does not granger cause m2 0.29899 0.7442 copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 38 cannot fully insulate their real spending from changes in the availability of bank credit. the importance of the credit channel depends on the extent to which banks rely on deposit financing and adjust their loan supply schedules following changes in bank reserves; and also the relative importance of bank loans to borrowers. consequently, monetary policy will have a greater effect on expenditure by smaller firms that are more dependent on bank loans, than on large firms that can access the credit market directly through stock and bond markets (and not necessarily through the banks). the positive findings of the study confirm the findings of zuzana, riikka and laurent (2015) who found no evidence of the bank lending channel through the use of reserve requirements. the author noted that changes in reserve requirements influence loan growth of banks. the findings of joão, barroso and gonzalez (2017) that the easing impacted the lending channel on average two times more than the tightening. foreign and small banks mitigate these effects and banks are prone to lend less to riskier firms. the findings of mohammed (2014) that there was co-integration between re-positioning of commercial banks and capacities of smes to deliver services and also a significant dispersion resulting from lending conditions and macroeconomic variables and the findings of ovat (2016) that exchange rate and lending rate are statistically significant to smes credit. model 2 examined the relationship between money supply and credit to core private sector in nigeria. from the estimated regression model, the vector error correction result in table 4 shows that the relationship between money supply and credit to core private sector is high and significant. this is because of an r2 of 0.844319 meaning that the model explains approximately 84.4 percent of the total variations in the credit to core private sector, the error correction model shows a negative value of -1.672063 which is appropriate and is significant. this means that 167 percent of the deviation from long run equilibrium relationship in the credit to core private sector is corrected every year since credit to core private sector is estimated annually. some of the values of the coefficient of independent variables, that is money supply are positive and also proved negative at various lags. furthermore, it was found that the result of the error correction in table 4, the f*cal = 4.406521 > f*tab = 2.24 at 5% n=31 is statistically significant which is supported with a probability value of 0.005035< 0.05 at 5% is significant, we therefore reject the null hypothesis, that is β1-β4 (money supply) is statistically significant with credit to core private sector in nigeria. the findings of this study is supported by keynesian liquidity preference theory as it could be used to determines the interest rate by the demand for and supply of money which is a stock theory. it emphasizes that the rate of interest is purely a monetary phenomenon. it further validates loanable funds theory is a flow theory that determines the interest rate by the demand for and supply of loanable funds. the significant effect of monetary policy on bank credit to core private sector confirms the classical opinion on the relevant of money in the economy. the finding also supports the bank lending channel transmission of monetary policy. the monetary transmission mechanism describes how policy induced changes in the nominal money stock or the short-term nominal interest rates impact real variables such as aggregate output and employment. bernanke and gertler (1995) noted that bank lending channel centers on the possible effect of monetary policy actions on the supply of loans by depository institutions. it is also evidence that, the positive findings of the study confirm the findings of zuzana, riikka and laurent (2015) who found no evidence of the bank lending channel through the use of reserve requirements. the author noted that changes in reserve requirements influence loan growth of banks. the findings of joão, barroso and gonzalez (2017) that the easing impacted the lending channel on average two times more than the tightening. foreign and small banks mitigate these effects and banks are prone to lend less to riskier firms. it also confirms the positive findings of sesay and abdulai (2017) that suggest that money supply and gross domestic savings exert positive and statistically significant effect on private sector investment. they opine that financial institutions should increase the credit delivery to the private sector in a bid to facilitate private sector investment drive. olorunmade et al. (2019) also finds significant relationships between private sector credit and economic growth and significant relationship between total credits to private sector and money supply in nigeria. their study revealed that private sector credit impact positively on the growth of the economy in nigeria. the findings of mohammed (2014) that there was co-integration between re-positioning of commercial banks and capacities of smes to deliver services and also a significant dispersion resulting from lending conditions and macroeconomic variables and the findings of ovat (2016) that exchange rate and lending rate are statistically significant to smes credit. abdullahi (2014) study shows that the positive relation observed between credit to the private sector and money supply indicates that such credit only increases money supply in the economy and that the funds were not properly annexed into productive activities. model 3 examined the relationship between money supply and credit to private sector in nigeria. it is evidence that the estimated regression model from result of the vector error correction result in table 9 the relationship between money supply and credit to small and medium scale enterprises sector is moderate and not significant. this is because of an r2of 0.625345 meaning that the model explains approximately 62.5percent of the total variations in the credit to small and medium scale enterprises sector. copyright © cc-by-nc 2020, cribfb | asfbr www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 4, no. 1; 2020 39 it is also evidence that the error correction model shows a negative value of -0.424263 which is appropriate and is significant. this means that 42.4 percent of the deviation from long run equilibrium relationship in the credit to small and medium scale enterprises sector is corrected every year since credit to small and medium scale enterprises sector is estimated annually. some of the values of the coefficient of independent variables, that is money supply variables are positive and also proved negative at various lags. the findings of the study confirm the findings of otalu, aladesanmi and mary (2014) that money supply and cash reserve ratio appeared to have statistically significant influenced deposit money banks’ credit creation and jegede (2014) who specifically revealed that liquidity ratio and money supply exert negative effect on commercial banks’ loan and advances. the study concludes that monetary policy instruments are not effective to stimulate commercial bank loans and advances in the long-run. anigbogu, okoli and nwakoby (2015) that with the exception of bank interest rate to smes, all other variables namely bank lending rate to smes, exchange rate and monetary policy have a positive and significant influence on small and medium enterprises performance in nigeria. findings are also consistent with the works of olorinmade et al. (2019) that there was significant relationship between total credits to the private sector and money supply in nigeria. this implies that the volume of money supply is enough to facilitate and guarantee the disbursement of credits to small and medium scale enterprises sector in nigeria. dada (2014) that commercial banks credit to smes and the saving and time deposit of commercial banks exert a positive and significant influence on smes and suleyman (2013) that money supply has a strong effect for manufacturing sector credit volume. abdullahi (2014) study shows that the positive relation observed between credit to the private sector and money supply indicates that such credit only increases money supply in the economy and that the funds were not properly annexed into productive activities. 6. conclusion and recommendations with the f*cal =3.093507 > f*tab = 2.24 the study conclude that there is significant relationship between money supply and credit to private sector in nigeria. from the result, the f*cal =4.406521 > f*tab = 2.24, the study conclude that there is significant relationship between money supply and credit to core private sector in nigeria. the f*cal =4.331540> f*tab = 2.24, the study conclude that there is significant relationship between money supply and credit to small and medium scale enterprises sector in nigeria. 7. recommendations the study recommends that the monetary authorities should ensure adequate quantity of money supply that affect positively private sector funding in nigeria. this is because money does not affect only the absolute price and quantity of trade, but it affects also the level of financial intermediation. references adegbola, e.a.; fadipe, t.g. & olajide, a.t. 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(2015). reserve requirements and the bank lending channel in china (september 21, 2015). bofit discussion paper no. 26/2015. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). asian finance & banking review vol. 5, no. 1; 2021 issn 2576-1161 e-issn 2576-1188 published by cribfb, usa 1 does election impact on stock market returns in bangladesh? gourav roy mba graduate department of finance university of dhaka dhaka, bangladesh e-mail: gouravroy.du@gmail.com md atiqullah khan mba graduate department of finance university of dhaka dhaka, bangladesh e-mail: writetoatiq@gmail.com abstract this paper investigates the impact of parliamentary general election on the stock market returns by considering the previous fifteen days and the after fifteen days of each of six elections in bangladesh held between 1991 and 2018. the study analyzed the election effect on stock returns through considering both abnormal returns by choosing 20 stocks as a proxy of portfolio motive of the investors and the broad index returns as a measurement of whole market scenario. the study employed descriptive statistics, t-tests, and f-tests to understand the impact of election by gauging the changes in return series. descriptive statistics showed very high differences in means, standard deviations, and volatilities. paired t-tests showed significant differences between the means and f-tests showed significant differences between the variances of the returns during before and after days of these elections. the results were the same for abnormal returns and broad index returns. the impacts of individual election on the returns were also found as the same in most cases. the study has found some very useful insights part of which can benefit the policymakers to reform the policies. the common investors and the financial market participants can also make better investment plan. keywords: election, event study, stock returns, dse, bangladesh. jel classification codes: d72, g14, p48. introduction stock market is considered as the mirror of the economy of a country (jensen, mercer & johnson, 1996). the growth of the stock market is also an evidence of economic progress of a country. the stock market determines how capital is formulating in the veins of a nation. thus, the fluctuation or volatility of a stock market means a big thing to be concerned of for the https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 2 investors, government, and common people as well. different economic and non-economic factors impact on it. different political forces and political shifts play as very important factors for almost all the stock markets. the political events determine what will be the economic changes in the country for the future and the present. with this consideration, the parliamentary general election is a highly noticeable event that can highly impact on an economy including the stock market performance. bangladesh is a country with having the total gdp of usd 313 billion (haroon, 2020). dhaka stock exchange (dse) is the major stock exchange of bangladesh with having over 383 companies and several bonds listed on it. the total market capitalization of it is about usd 59.32 billion (the financial express, 2021). as like other stock markets around the world, stock market of bangladesh also gets influenced by different forces. as bangladesh is a very politically indulged country and the economic decisions and financial activities are highly influenced by political decisions and structural planning of ruling government, so does the base of the study get motivation to dig a hole to know the impact of election on the stock market performances of bangladesh. from the aspect of bangladesh, the relation of stock market volatility with the election movements and events can also have strong correlations. surely, it requires a high level of investigation to know whether there exists any relation between stock market returns and general election in bangladesh. if it exists, then what the directions are that actually follow. moreover, the investors are not properly aware of the growth stocks and value stocks and the political momentum with respect to these types of stocks. as the general elections determine who will be in governance for the next five years, the common investors and financial market participants always try to take a safe position before the general election. sometimes the herd instinct of the investors makes the market too much volatile and also makes it go up too much imprudently or go down too much drastically. thus, the background of the study is fully concentrated on analyzing the relationship between parliamentary general elections and stock market returns. this paper aims at fulfilling these objectives:  to understand whether there exists any relationship between parliamentary general election and stock market returns in bangladesh.  to inform the common investors, financial market participants, and researchers about the election effect on the stock market returns of bangladesh. the study incorporates the information for 29 years (1991-2018) to determine the election effect on the market performances. dhaka stock exchange (dse) has been considered as the proxy of stock exchanges in bangladesh to avoid any repetitive information in the study. for structuring the data, the event window has been considered as the election date and the estimation window has been considered as the 15 days before the election and 15 days after the election as per the market model (mackinlay, 1997) and the necessary key techniques of some steps that have been guided by (kabiru, ochieng, & kinyua, 2015). the study has some limitations. the findings are based on historical information and not progressive in reality. there is no concrete evidence that the result of the study has the possibility of repetition in future. due to the incongruence of data, 2001 election wasn’t taken into consideration in this study. even though existence of these limitations, the study is believed to control the other corners to legitimately represent the accurate view of the implementation of the purpose of the study. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 3 the studies and the findings conducted in previous researches are described in second part of this paper. the third part of the paper discusses about the data and methodology of the studies. the fourth part discusses about the analysis and findings and the last part includes conclusion and policy recommendations. thus this paper completes the investigation of the impact of parliamentary election on stock market returns in bangladesh. review of literature there prevail some previous studies to understand the impact of general election on stock market performance. some of the relevant literature reviews are discussed below: niederhoffer, gibbs and bullock (1970) examined the stock market actions by considering the before and after the days and months of us presidential general elections to find out the connections between us political events and the us stock market movements which created many investigations and interests. later, jensen, mercer & johnson (1996) stated that the stock market gets influenced by the common investors’ behavior and trading strategies which are also influenced by the economic and political changes that take place in the country. foerster and schmitz (1997) in their study tried to focus on the us parliamentary general election cycles where there existed a concrete relation between stock markets and political event like pge. the study not only covered the us stock markets but also covered the oecd countries. in this study, total 18 countries were considered and the spectrum of the study was from 1957 to 1966. the study showed that the pattern was existent between the variables. but the expectation that us stock markets would be mostly affected by this parliamentary general election and the other oecd countries would not be affected significantly was not true. the hypothesis was rejected in the sense that both the us countries and the oecd countries had similar sort of significance with respect to the parliamentary general election. pantzalis, stangeland, and turtle (2000) tried to show some scrutiny on the stock market performance moving around the parliamentary general election on a national level and international scale of 33 countries and discovered that the criteria of index abnormal returns (iars) are usually having a significantly differentiating outcome near the fifteen days plus and minus the event. booth and booth (2003) analyzed the presidential mystery to advantage small capitalized stocks, where no noteworthy variance between the returns of large capitalized stocks during the regimes of both democratic and republican presidents. at the same time, santa-clara and valkanov (2003) tried to find out some linkage between us parliamentary general election and us stock market movements. they focused on the study in a different angle from the previous researches. they focused on the capitalization of stocks and how the large and small stocks did perform under the event of parliamentary general election. they found that the large capitalized shares tended to perform better when the government of usa was taken over by the democratic parties. it has been seen that large-cap stocks and securities tended to get a 7% better result under the democratic parties of us. but the small stocks tended to get a better result of 22% than the normal cases under the republican parties. later, anderson, malone & marshall (2008) distinguished that the political impacts of usa are not as easy as it can be for other countries. the impacts and consequences are quite complicated. the governmental and political finance during the pge is not clearly exposed in usa. that is why the common investors solely depend on the expansionary goals of the political candidates of usa and based on that they tend to take decisions where to invest and where to not. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 4 bialkowski, gottschalk, and wisniewski (2007) studied a case including 27 countries who were the members of oecd in which they tried to show some relation of national elections tempting to higher stock market volatility. their experimental outcome of the research shows that investors (institutional and financial market participants) are still astounded by the ultimate casting of votes. stock prices tend to react powerfully in response of this astonishment and momentarily raised levels of uncertainty. irungu (2012) examined the stock data elements of parliamentary general election consequences under the announcement at the nairobi securities exchange by means of the methodologies used in events study for the ten year periods from 1997 to 2007 and instituted that the cars (cumulatively abnormal returns) showed a dropping trend or function of movement in the periods before the announcement and a slower or a medium pattern increase after the event happening announcement representing to market receiving and reacting to the information in the investors’ confidence and stability in political balance. menge, mwangi, and kimani (2014) detailed the outcome of parliamentary general election on stock market yields at the nairobi securities exchange (nse) implementing the methodology of the events studies that covered an eleven year periods from 2002 to 2013 which established the fact that that actual returns using the return series formula were pointedly higher before the event of elections but not so much higher after the event of election periods. the assumptions made out of the consequences that the expected returns as well as the market returns tend to show a specific movements of increase before the election but decrease or remain stagnant after the election. here is the list of the findings of some studies regarding the research: table 1. evidences that found link between elections and stock market movements event researched by impact on stock market before the event impact on stock market after the event existence of relation 1987 ge*, uk lehander and lönnqvist (2011) british telecom share price fell sharply. british telecom share price moved up sharply. existent ten developed countries’ ges niederhoffer, gibbs and bullock (1970), peel and pope (1993) and gemmil (1992) the broad index goes down before the election. the broad index went up after the election. existent ges of usa booth and booth (2003) the small stocks underperformed before election the small stocks over performed after elections existent ges of usa hensel and ziemba (1995), the large stock in usa had almost no impact before election the large stock in usa had almost no impact after election nonexistent https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 5 ges of usa santa-clara and valkanov (2003) the large stocks performed better in democratic presidency the large stocks performed better than before when democratic presidency continued existent ges of usa and impact on 18 oecd countries foerster and schmitz (1997) there were huge downfall before presidency election in these eighteen countries’ stock exchanges whether the stock index will go up or down depended on who is going to chair the presidency of usa existent study on new zealand stock market due to ge. cahan et al., (2005) broad index goes up generally before election broad index goes down existent 27 oecd countries’ ges and their respective stock exchanges bialkowski, gottschalk and wisniewski (2007) huge volatility among stocks; some move up and some down the stocks related to government financing tended to move up while the others faced negative changes existent belgium’s ge vuchelen (2003) huge volatility among stocks; some move up and some down the volatility tends to continue even after one month existent taiwan ge hung (2011) election cycle exists fluctuation occurs after election existent nairobi stock exchange and ge in kenya irungu (2012) stock index falls stock index rises existent a study covering ten recent years tenure on kenya menge, mwangi and kimani (2014) some selected twenty stocks had upward trend in returns some selected twenty stocks had downward trend in returns. it was found of political finance involvement. existent note. *ge stands for general election the table 1 shows that the research findings of the previous studies. in the above table, almost all of the relevant researches on the same interest fields have been discussed with their findings. it is seen that almost in every study the impact of general election on stock market movement is existent. but whether stock prices or, index returns will go up or down before or after the election was not determined. it’s evident that the impact of general election on stock market returns is existent. there has been so many researches that have been done on many countries including the usa, new zealand, kenya, taiwan, uk, belgium, european countries etc. but such types of https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 6 valuable and necessary analysis was yet to be institutionalized and published so far from the context of bangladesh. again, no such study has been done before that incorporated both the abnormal returns and the index returns separately to analyze both the portfolio and index based relationship analysis in this aspect. thus, this paper has been designed to complete this research gap. data and methodology data the study required stock price data and broad index data for the period of 1991-2019 which were collected from dhaka stock exchange website ("dhaka stock exchange", 2019). for the analysis of data, ms excel and stata software were used. methodology to understand the impacts of election on stock market returns in bangladesh, this research followed the perspective of the motive of general investors and the perspective of whole stock market scenario. the research fully concentrated on event studies and thus the research followed the methodologies of event studies. the study followed these steps for analyzing the data: step 1: identification of event interest and event window the study considered six out of seven parliamentary general elections held in bangladesh during 1991 to 2018 to discover something not investigated before. the table 2 given below summarized the elections and the event windows: table 2. the data structure of the event and estimation period for the study election pre-event window event date post-event window old govt. new govt. 1991 before 15 days 27 february, 1991 after 15 days jp bnp 1996a before 15 days 15 february, 1996 after 15 days bnp bnp 1996b before 15 days 12 june, 1996 after 15 days bnp bdal 2008 before 15 days 29 december, 2008 after 15 days bnp bdal 2014 before 15 days 5 january, 2014 after 15 days bdal bdal 2018 before 15 days 30 december, 2018 after 15 days bdal bdal note: here, jp, bnp, and bdal stand for jatiya party, bangladesh nationalist party, and bangladesh awami league respectively step 2: selection of the firms for constructing investment portfolio the study on analyzing the impact of general elections on the abnormal returns of stock market of bangladesh required to select some stocks listed on dse from portfolio perspective that could replicate the stock market from 1991 to 2018. to meet this purpose, the proper selection of the stocks was very crucial to get in on a particular to the accurate results. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 7 table 3. list of chosen 20 stocks form diversified industries name of the stock respective industry listing year 01. eastern cables limited engineering 1986 02. monno ceramics industries limited ceramics 1983 03. investment corporation of bangladesh nbfis 1977 04. united insurance limited insurance 1990 05. padma oil company limited fuel & power 1976 06. bata shoe company (bangladesh) limited tannery 1985 07. sonali aansh industries limited jute 1985 08. heidelberg cement bangladesh limited cement 1989 09. stylecraft limited textiles 1983 10. olympic industries limited food and allied 1989 11. national tea company limited food and allied 1979 12. beximco pharmaceuticals limited pharmaceuticals and chemicals 1986 13. ambee pharmaceuticals limited pharmaceuticals and chemicals 1986 14. kohinoor chemicals company (bangladesh) limited pharmaceuticals and chemicals 1988 15. the city bank limited banking 1986 16. uttara bank limited banking 1984 17. united commercial bank limited banking 1986 18. usmania glass sheet factory limited miscellaneous 1987 19. gq ball pen industries limited miscellaneous 1986 20. bangladesh export import company limited (beximco) miscellaneous 1989 the table 3 shows the 20 stocks chosen from respective industries. the selected stocks were having their smooth existence from 1991 to 2018 so that the study could get enough data of the stock prices, dividends, right shares, splits, and bonus shares. step 3: adjustment of the price data to make the data authentic and free from different types of biasness, all the price data of these 20 stocks were adjusted as per cash dividends, stock splits, bonus share issue, right share issue, capital gains etc. step 4: calculation of total actual returns after that, the study computed the changes recorded in share prices to determine the actual return as per following formula: actual return of stock i in day t, acrit=[(pt-pt-1)/pt-1] (1) https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 8 where, pt = the price of a stock i in day t; and, pt-1= the price of stock i at previous trading day (t-1). thus, total actual returns were calculated by summing all the returns from these 20 stocks through using this formula: total actual returns in day t, tacrt=(acr1t + acr2t + acr3t + ……….………+ acr20t) (2) step 5: calculation of market return series of broad index dsex, the broad index of dhaka stock exchange, has been chosen as a proxy of whole stock market. the return series of dsex for 15 trading days before and 15 trading days after of each election have been calculated and used for testing the hypotheses to get the broad picture in case the analysis of abnormal returns fails to replicate the stock movements due to national election. the changes in the dsex index for each day were computed denoted as the whole market return or index return as per following formula: index returns in day t, irt=[(dsext-dsext-1)/dsext-1] (3) here, dsext = the dsex index in trading day t; and, dsext-1 = the dsex index in previous trading day (t-1). step 6: calculating abnormal returns the research applied the formula to get abnormal returns: abnormal returns, art=( tacrt irt) (4) step 7: calculation of cumulative abnormal returns and cumulative index returns the cumulative return based analysis was carried on to move the discussion to ultimate culmination of result to inform how the general election has impact on the stock market movements from the aspect of bangladesh. thus, cars (cumulative abnormal returns) and cumulative index returns (cirs) were also calculated for farther analysis and graphical representations. here, cars and cirs show the reaction of the investors before and immediately after the election event. the total 30-day cars and cirs provide a clear understanding of the market response for the election. the cars and cirs for each day were calculated as per following formulae: here, cart = σart (5) where, cart is the cumulative abnormal returns in day t. and, cirt = σart (6) where, cirt is the cumulative index returns in day t. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 9 testing the hypotheses and models of the study for the overall statistical techniques and their application and interpretation of the study, the following hypothesis hold for the entire study: h0: there exists no relationship between the election and stock market returns. h1: there exists relationship between the election and stock market returns. in this step, three statistical techniques that have been used to apply with their respective hypotheses to prove the main hypothesis of the study and these are: descriptive statistics: the descriptive statistics helps to find out the essential information about the means, standard deviation, minimum and maximum of dataset. this information is necessary to know the ranges, volatility levels, and fluctuation extents of the return series data for both before and after the elections to compare the differences. paired t-tests: the paired t-test helps to test the hypothesis that whether there exists any significant difference between the means of the datasets of before and after the elections. for this t-test, the hypotheses are: h0: there exists no difference between the means of before election datasets and after election datasets. h1: there exists difference between the means of before election datasets and after election datasets. f-tests: in this study, f-test has been used for checking the hypothesis of finding if there exists any significant difference between the variances of the data sets. if the hypothesis is proved, it can be concluded that there exists a relation between election and stock market returns. the hypotheses are: h0: there exists no difference between the variances of the before election datasets and after election datasets. h1: there exists difference between the variances of the before election datasets and after election datasets. with 90% confidence interval, all of the datasets for both individual election and altogether are to be statistically tested to get to the ultimate decision with holding the hypothesis. analysis and findings this part of analysis has completely focused on the findings received through analyzing the data of abnormal returns and index returns. all the analysis was carried on to move the discussion to ultimate culmination of result to inform how the general election has impact on the stock market returns from the aspect of bangladesh. descriptive statistics the descriptive statistics of the abnormal returns shown on table 4 indicate that differences between the means of the returns of before and after each election are very high, the standard https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 10 deviations of the abnormal returns in case of the after elections are higher than the abnormal returns of before elections in most cases. the minimum and maximum values have huge differences representing high volatilities due to election effects. table 4. descriptive statistics of the abnormal returns election obs mean standard deviation minimum maximum before after before after before after before after 1991 15 -0.1385 0.1422 0.099 0.180 -0.376 -0.422 -0.011 0.326 1996a 15 -0.0420 0.3278 0.239 0.288 -0.559 -0.116 0.404 0.921 1996b 15 -0.0571 0.3162 0.338 0.413 -0.483 -0.222 0.707 1.486 2008 15 -0.1478 0.1946 0.383 0.476 -0.914 -0.779 0.427 0.847 2014 15 -0.1063 0.0429 0.203 0.152 -0.428 -0.250 0.127 0.290 2018 15 -0.0013 0.2000 0.454 0.498 -0.304 -0.226 1.593 1.849 all elections 90 -0.0822 0.2040 0.305 0.365 0.914 -0.779 1.593 1.849 here, the means of abnormal returns representing the general motive of the investors are 0.0822 or, -8.22% before all the elections and 0.2040 or, 20.40% after all the elections. it also shows that the mean of abnormal returns after election was always higher than the mean of abnormal returns before election in each election. it’s evident that the stock market performs worse before the election and does better after the election through considering abnormal returns. the standard deviation, minimum and maximum limits of the data also describe the findings. table 5. descriptive statistics of the index returns election obs mean standard deviation minimum maximum before after before after before after before after 1991 15 0.0002 0.0026 0.001 0.007 -0.002 -0.001 0.003 0.027 1996a 15 0.0008 0.0033 0.007 0.005 -0.012 -0.006 0.019 0.011 1996b 15 0.0019 0.0046 0.007 0.011 -0.015 -0.016 0.011 0.032 2008 15 0.0014 0.0032 0.016 0.024 -0.039 -0.029 0.030 0.070 2014 15 -0.0002 0.0066 0.007 0.006 -0.009 -0.006 0.014 0.014 2018 15 -0.0014 0.0034 0.002 0.008 -0.005 -0.008 0.002 0.024 all elections 90 0.0004 0.0039 0.008 0.012 -0.039 -0.029 0.030 0.070 the descriptive statistics of broad index returns represented as whole market scenario shown on table 5 indicate that differences between the means of the index returns of before and after each general election are very high, the standard deviations of the returns in case of the after elections are higher than the index returns of before elections in most cases. the minimum and maximum values have huge differences representing high volatilities due to election effects. the https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 11 means of index returns representing whole market scenario are -0.0004 or, -0.04% before all the elections and 0.0039 or, 0.39% after all the elections. it also shows that the mean of index returns after election was always higher than the means of index returns before election in each election. it’s evident that the stock market performs worse before the election and does better after the election under whole market scenario too. the standard deviation, minimum and maximum limits of the data also summarize the findings. graphical representation of the cars and cirs the cumulative abnormal returns (cars) and the cumulative index returns (cirs) provide the understanding of the trends of the abnormal returns and the index returns. the trends of cars and cirs with graphical representation are shown below: -3 -2 -1 0 1 2 3 -15 -10 -5 0 5 10 15 1991 cars -0.01 0.00 0.01 0.02 0.03 0.04 0.05 -15 -10 -5 0 5 10 15 1991 cirs -1 0 1 2 3 4 5 6 -15 -10 -5 0 5 10 15 1996a cars -0.02 -0.01 0.00 0.01 0.02 0.03 0.04 0.05 0.06 -15 -10 -5 0 5 10 15 1996a cirs -2 -1 0 1 2 3 4 5 6 -15 -10 -5 0 5 10 15 1996b cars -0.04 -0.02 0.00 0.02 0.04 0.06 0.08 0.10 -15 -10 -5 0 5 10 15 1996b cirs https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 12 figure 1. trends of the curves of cars and cirs as per each election in each of the charts shown on figure 1, left side of vertical line shows the cumulative returns for the previous fifteen trading days of election and right side of vertical line shows the cumulative returns for the after fifteen trading days of election. except the chart of 2008 cirs, all the curves shown on figure 1 indicate the gradual decline in cumulative returns before the elections and the gradual increase in cumulative returns after the elections. it’s true for both the cumulative abnormal returns and cumulative index returns. thus, it’s an evidence of the significant impact of election on stock returns in bangladesh from both the portfolio motive of the investors and the whole market scenario. paired t-test results for abnormal returns and index returns the paired t-test results of the abnormal returns in table 6 show that there exist significant differences between the means of the returns of before and after days of all the elections. it also -3 -2 -1 0 1 2 3 4 5 -15 -10 -5 0 5 10 15 2008 cars -0.06 -0.04 -0.02 0.00 0.02 0.04 0.06 0.08 0.10 -15 -10 -5 0 5 10 15 2008 cirs -2 -2 -1 -1 0 1 1 2 -15 -10 -5 0 5 10 15 2014 cars -0.05 0.00 0.05 0.10 0.15 -15 -10 -5 0 5 10 15 2014 cirs -1 0 1 1 2 2 3 3 4 -15 -10 -5 0 5 10 15 2018 cars -0.04 -0.02 0.00 0.02 0.04 0.06 0.08 -15 -10 -5 0 5 10 15 2018 cirs https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 13 proves that in the overall case of test analysis, there exist significant difference between the means. thus, the null hypothesis could be rejected. it means the average of abnormal returns before the election get changed after the election. table 6. paired t-test results election paired t-test (abnormal returns) paired t-test (index returns) t value two-tailed p value (90% confidence interval) t value two-tailed p value (90% confidence interval) 1991 -4.5413* 0.001 -1.2721 0.224 1996a -5.5357* 0.000 -1.2396 0.236 1996b -2.6801* 0.018 -0.675 0.511 2008 -1.8596* 0.084 -0.1953 0.848 2014 -2.5085* 0.025 -3.4409* 0.004 2018 -3.2762* 0.006 -2.3683* 0.033 all elections -6.5839* 0.000 -2.0041* 0.048 note: here ‘*’ indicates significant the paired t-test results of the index returns shown on table 6 show that except for 1991, 1996a, 1996b, and 2008 general elections, all the other elections showed significant relationship between general elections and stock market movements. the test showed that in the overall case of test analysis, there existed significant difference between the means. thus, here the null hypothesis could be rejected too. the way of justification as like the findings through analyzing abnormal returns and the proper reasoning behind the acceptance of null hypothesis in 1991, 1996a, 1996b, and 2008 individual general election under index returns are that the dsex index was getting the lower category and poor quality of stocks offsetting the real moves that were faced by the stocks chosen for calculating abnormal returns thus veiling the true information. f-test results for abnormal returns and index returns the f-test is used for checking the hypothesis of finding if there exist any significant differences between the variances of the data sets. if the hypothesis is proved, it can be concluded that there exists a relation between election and stock returns. table 7. f-test results election f test (abnormal returns) f test (index returns) f value p value (90% confidence interval) f value p value (90% confidence interval) 1991 0.3024* 0.033 0.0303* 0.000 1996a 0.6896 0.496 2.3071 0.130 1996b 0.6676 0.459 0.373* 0.075 2008 0.647 0.425 0.4426 0.139 https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 14 2014 1.7902 0.288 1.3381 0.593 2018 0.832 0.736 0.0789* 0.000 all elections 0.7015* 0.096 0.4646* 0.000 note: here ‘*’ indicates significant the f-test results of the abnormal returns in table 7 show that there were significant differences of the variances between the datasets. only 1991 election accepted the null hypothesis. the f-test of the index returns show that there were significant differences of the variances between datasets. only 1991, 1996b, and 2018 elections accepted the null hypothesis. summary of all the findings so, from the above scrutiny and effective analyses of t-tests and f-tests, it can be concluded that the null hypothesis is rejected and the alternative hypothesis is accepted. it means that there exists a relationship between the election and stock market returns in bangladesh. the study tested the stock returns and found that in every election time period, the stock prices have negative shift before the election while these have a direct opposite shift right after the election. the most election cases and the overall averages of the stock returns showed that the null hypothesis should be rejected. it has been assured with proper justification of charts and interpretations in the findings and interpretations. so, it can be summed into following key understanding and findings:  in case of index returns represented overall market scenario, the impacts of election on stock market is not as strong as we see in the case of the abnormal returns generated from chosen twenty stocks.  the reason behind this sloth sensitivity is that there exists lower categories of stocks in the market which have the tendency to move directly to the opposite to the market trend, thus causing an offsetting impact and leading to make the means loosely different.  in bangladesh, the general election has negative consequences before the election and a positive consequence after the election on the stock returns.  the stock market confidence of the common investors is pretty low as they have a common tendency to sell off the securities in the fear of any political crisis or stock market mishaps. thus, it can be concluded from overall analysis that the null hypothesis is rejected and alternative hypothesis indicate that there exists a relation between general election and stock returns in bangladesh. conclusion the stock market of bangladesh is a pre-emerging market considered by most of the economists. it has been developing for many years in a fluctuating way, which sometimes creates risk and opportunities for some of the intermediaries who understand the functions of stock market in a better way. to identify the impact of general elections on stock market performance in bangladesh, the study has been conducted by considering six national elections held between 1991 and 2018. this is an event study based research and the stock returns of previous 15 days and after 15 days of each election have been taken into analysis to gauge the impact of the election effect on the returns. the statistical analyses of the study including descriptive statistics, t-tests, and f-tests found that the general election strongly influences both the abnormal returns https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 15 representing the motive of general investors and index returns representing whole market scenario. the stock selection and industry selection criteria as a measurement of abnormal returns for the investment motive of general investors were made in such a way that made the stocks and industries to represent the stock market of bangladesh from 1991 to 2018. the study has found some very interesting findings. to avoid any expectation loss, the investors should follow the trend and invest in stocks that are less susceptible to the election. the trend that has been observed in the study that the major stock prices or broad index tends to fall sharply before the election and goes up after the election. so, proper judgement should be made to take investment decision during this time. recommendations for policymakers the government and respected authorities regarding monetary and fiscal policies should incorporate some valuable issues in their actions. the market should be under proper surveillance all around the year and the speculating firms and stocks should be controlled under special policies by bangladesh securities and exchange commission. the speculative firms should be properly selected and updated time to time as per their performances so that the people become cautious of their trading and actions at the time of election. the limitation of fluctuation of the stock prices for any particular listed companies should be properly defined. the violation of fluctuating limit should be chastised by the authority. for common investors and financial market participants there has been existence of some unnecessary and poor stocks in the stock market which creates imbalance in the stock market movements and expectations. the situation aggravates when this stocks go out of the market by leaving the investors bare handed during the apprehensive days election so, these poor and volatile stocks should not be let to be invested in the stock market of bangladesh beyond a certain limit during election. the analysis of each individual election indicates that the stock prices of the market lead to go down before election and go up after election. thus the common investors should not get panicked for selling the stocks right before the election time without any jurisdiction. they should wait and let the market recover after the election. it has been noticed from the common cases under the study that the recovery that takes place after the election is much higher than it was before the election. so, a holding strategy will surely benefit the common investors and financial market participants. the election effect on bangladesh’s stock market should be added in literacy programs in national levels and higher secondary levels for educating the common investors about the stock market movements regarding parliamentary election days. the common investors should create such a diversified portfolio that will offset the probability of loss during elections. thus, the following of these recommendations can be of some improvement against the volatility of the stock price before and after the election and thus, lead to a stable stock market in bangladesh. references anderson, h., malone, c., & marshall, b. (2008). investment returns under rightand left-wing governments in australasia. pacific-basin finance journal, 16(3), 252-267. https://10.1016/j.pacfin.2007.06.002 https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 16 bialkowski, j., gottschalk, k., & wisniewski, t. (2007). political orientation of government and stock market returns. applied financial economics letters, 3(4), 269-273. https://10.1080/17446540701222359 booth, j., & booth, l. (2003). is presidential cycle in security returns merely a reflection of business conditions?. review of financial economics, 12(2), 131-159. https://10.1016/s1058-3300(02)00061-7 cahan, j., malone, c. b., powell, j. g., & choti, u. w. (2005). stock market political cycles in a small, two-party democracy. applied economics letters, 12(12), 735-740. dhaka stock exchange. (2019). retrieved from https://dsebd.org/ foerster, s., & schmitz, j. (1997). the transmission of u.s. election cycles to international stock returns. journal of international business studies, 28(1), 1-13. https://10.1057/palgrave.jibs.8490089 gemmill, g. (1992). political risk and market efficiency: tests based in british stock and options markets in the 1987 election. journal of banking & finance, 16(1), 211-231. gilson, r. j. & black, b. s. (1995). the law and finance of corporate acquisitions. haroon, j. (2020). bangladesh economy to become 28th largest in 2030. the financial express. retrieved from https://www.thefinancialexpress.com.bd/economy/bangladesh/bangladesh-economy-tobecome-28th-largest-in-2030-1609126443 hensel, c. r., & ziemba, w. t. (1995). united states investment returns during democratic and republican administrations, 1928-1993. financial analysts journal, 61-69. hung, l. (2011). the presidential election and the stock market in taiwan. irungu, a. (2012). informational content of general election results announcement at the nairobi securities exchange (master of science in finance). university of nairobi. jensen, g., mercer, j., & johnson, r. (1996). business conditions, monetary policy, and expected security returns. journal of financial economics, 40(2), 213-237. https://10.1016/0304-405x(96)89537-7 kabiru, j., ochieng, d., & kinyua, h. (2015). european scientific journal, 11(28), 435-460. retrieved from http://erepository.uonbi.ac.ke/handle/11295/96060 lehander, s., & lönnqvist, f. (2011). parliamentary elections‟ impact on stock market returns (masters). stockholm school of economics. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 17 mackinlay, a. (1997). event studies in economics and finance. journal of economic literature, 35(1), 13-39. retrieved from https://www.jstor.org/stable/2729691 markowitz, h. (1952). portfolio selection. the journal of finance, 7(1), 77-91. retrieved from https://www.jstor.org/stable/2975974 menge, r., mwangi, m., & kimani, j. (2014). effect of elections on stock market returns at the nairobi securities exchange. prime journal of social science, 3(6), 763-768. retrieved from https://www.semanticscholar.org/paper/effect-of-elections-on-stock-marketreturns-at-the-menge-mwangi/43d27ec294be258ee6092445da281de1b3ac8591 niederhoffer, v., gibbs, s., & bullock, j. (1970). presidential elections and the stock market. financial analysts journal, 26(2), 111-113. retrieved from https://www.jstor.org/stable/4470664 pantzalis, c., stangeland, d., & turtle, h. (2000). political elections and the resolution of uncertainty: the international evidence. journal of banking & finance, 24(10), 15751604. https://10.1016/s0378-4266(99)00093-x peel, d. & pope, p. (1983). general election in the u.k. in the post-1950 period and the behavior of the stock market, investment analysis 67, 4-10 santa-clara, p., & valkanov, r. (2003). the presidential puzzle: political cycles and the stock market. the journal of finance, 58(5), 1841-1872. https://doi.org/10.1111/15406261.00590 the financial express. (2021). dsex drops 100 points over lockdown fears. retrieved from https://thefinancialexpress.com.bd/stock/dsex-drops-100-points-over-lockdown-fears1624791410 vuchelen, j. (2003). electoral systems and the effects of political events on the stock market: the belgian case. economics & politics, 15(1), 85-102. acknowledgements the authors express their gratitude to nausheen rahman, professor, department of finance, university of dhaka and md. sajib hossain cfa, assistant professor, department of finance, university of dhaka for their expert advice and encouragement throughout the research. appendices appendix a: list of abnormal returns and index returns day abnormal returns index returns 1991 1996a 1996b 2008 2014 2018 1991 1996a 1996b 2008 2014 2018 -15 -0.075 0.313 -0.367 0.413 -0.388 1.593 0.000 -0.012 -0.003 -0.039 0.000 0.000 -14 -0.174 -0.103 -0.483 -0.626 -0.151 -0.110 0.001 0.001 0.006 0.002 0.001 0.001 -13 -0.056 -0.559 0.065 -0.914 0.068 -0.019 0.000 0.019 -0.002 0.020 -0.008 -0.004 -12 -0.376 0.165 0.096 -0.226 0.127 -0.029 0.000 -0.002 -0.003 -0.002 -0.004 -0.004 https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 18 -11 -0.011 0.404 0.707 -0.190 0.068 -0.038 -0.001 0.000 -0.015 0.011 -0.002 0.001 -10 -0.162 -0.226 0.115 0.276 0.061 -0.092 0.002 0.001 -0.006 0.002 -0.007 -0.003 -9 -0.041 -0.076 0.601 -0.018 -0.006 -0.296 -0.002 0.000 0.002 -0.003 0.001 0.002 -8 -0.147 0.139 -0.250 -0.067 -0.343 -0.126 -0.001 -0.003 0.010 -0.012 0.010 0.001 -7 -0.139 0.042 -0.279 0.007 -0.076 -0.103 0.000 -0.005 0.011 -0.011 -0.006 0.000 -6 -0.025 0.012 -0.084 -0.202 0.015 -0.097 0.000 -0.004 0.000 0.016 -0.009 0.002 -5 -0.303 -0.014 -0.291 -0.467 0.074 -0.304 0.003 -0.003 0.007 0.030 -0.007 -0.002 -4 -0.130 -0.248 -0.229 0.427 0.060 0.006 -0.001 0.005 0.009 -0.002 0.002 -0.003 -3 -0.116 -0.156 -0.250 -0.588 -0.428 0.041 0.000 0.007 0.009 0.006 0.014 -0.003 -2 -0.154 -0.197 -0.001 -0.131 -0.356 -0.165 0.000 0.008 0.001 0.009 0.005 -0.005 -1 -0.170 -0.125 -0.208 0.091 -0.317 -0.281 0.002 -0.001 0.002 -0.008 0.007 -0.003 0 1 0.325 0.616 0.222 -0.779 0.242 1.849 -0.001 0.001 0.013 0.070 0.002 0.002 2 0.217 0.208 -0.018 0.211 0.059 -0.128 -0.001 0.007 0.013 0.005 -0.006 0.024 3 -0.007 0.040 0.377 0.264 0.056 0.119 0.008 0.007 0.003 0.013 0.008 -0.008 4 0.180 0.736 0.085 0.716 -0.250 -0.011 0.000 0.001 0.005 -0.012 0.014 -0.001 5 -0.422 0.290 0.595 0.847 0.290 0.144 0.027 0.001 0.005 -0.018 0.004 0.005 6 0.247 0.503 0.081 0.251 0.124 -0.009 0.000 0.001 0.032 0.001 0.007 0.004 7 0.075 0.375 0.154 0.436 0.220 0.122 0.002 -0.006 0.007 -0.012 0.004 0.000 8 0.221 0.921 0.303 0.026 -0.126 0.079 -0.001 0.002 -0.001 -0.004 0.009 0.000 9 0.152 0.336 1.486 0.088 0.118 0.337 0.002 0.001 -0.014 0.003 0.006 -0.005 10 0.142 0.394 0.731 0.469 0.000 -0.107 0.000 0.007 -0.016 -0.005 0.010 0.006 11 0.205 -0.016 0.561 0.268 0.162 -0.226 0.001 0.010 -0.005 -0.006 -0.003 0.011 12 0.158 -0.116 0.249 0.312 -0.063 0.102 0.002 0.011 0.005 -0.008 0.008 0.013 13 0.230 0.078 -0.069 0.724 -0.089 -0.105 0.002 0.003 0.005 -0.029 0.012 0.006 14 0.083 0.425 -0.222 -0.769 -0.075 0.541 0.000 -0.002 0.008 0.038 0.013 0.000 15 0.326 0.127 0.207 -0.144 -0.026 0.294 0.000 0.005 0.009 0.012 0.012 -0.006 copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0) asian finance & banking review vol. 5, no. 1; 2021 issn 2576-1161 e-issn 2576-1188 published by cribfb, usa 30 impact of buyer’s lenient policy of return and trust on internet purchase decision in supply chain sector of pakistan muhammad ammad ansari mba in supply chain management karachi university business school university of karachi, pakistan e-mail: ammadraees@gmail.com dr. sohaib uz zaman assistant professor karachi university business school university of karachi, pakistan e-mail: sohaibuzzaman@uok.edu.pk abstract this article aims to investigate the factors that impact the internet purchase decision in supply chain sector of pakistan because our mode of purchasing has been changed dramatically as a result of the internet. an increasing number of individuals prefer online mode of shopping rather than in physical stores. despite of these benefits there possess some cons of online purchasing like complicated returns, difficult websites, no sales assistance and lack of trust. in this article, impact of two independent variable i.e., lenient policy of return of buyer and trust of buyer was analyzed against the dependent variable internet decision of purchase. a questionnaire of 21 questions was prepared. data of 100 respondents was collected from buyers of karachi. reliability analysis, anova and regression analysis are performed using spss tool to find the results. study concluded that lenient policy of return of buyer and trust of buyer has positive association with internet decision of purchase in pakistan which means when buyers are provided with lenient policies for the return of goods for any reason and their trust in seller increases it will impact the decision of purchase positively. thus, it will be beneficial in terms of chasing market competition and generating higher returns. keywords: lenient policy of returns, customer trust, internet purchase decision, regression analysis, supply chain sector, pakistan. introduction the internet is a significant piece of every day and week by week exercises of people approaching it. it is an entryway to the universe of information. internet buying and selling has gained a significant growth in pakistan as well. store's merchandise exchange was a significant factor in a buying choice. in this way, having a thoroughly examined merchandise exchange policy showed in your store is a critical way to keep your clients. a merchandise exchange is acceptable business for physical stores, and it's fundamental to working together on the web too. mailto:ammadraees@gmail.com https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 31 in contrast to physical stores, online shoppers don't see and hold the actual item before they get it. so, the online business dealers should guarantee that merchandise exchanges are reasonable and interesting to their clients. a brief and clear merchandise exchange gives shoppers a sense of safety that what they are purchasing is destined to be what it is addressed to be. assuming a retailer doesn't give this assurance; shoppers frequently become dubious and try not to purchase the item. many merchandise exchanges have restrictive arrangements which may become barrier in internet decision of purchase. client trust is a proportional conduct to what they get. trust comes when you comprehend your client's necessities, regard them, and proposition important assistance. acquiring client's trust is significant not exclusively to make them faithful and return, yet in addition so they demand their companions work with you as well. trust is an administration system seeing someone concerning trades. it is portrayed by vulnerability, weakness or reliance grazioli and jarvenpaa (2003). in early explores, scarcely any variables have been perceived to impact internet shopping practices with the assistance of brought together buyer situated exploration model. the significant forerunners to online shopper conduct were taken to be earlier web-based shopping experience and trust. grazioli and jarvenpaa (2003) upheld that client don't take part in web-based shopping because of absence of trust. a customer's propensity to acquire a certain product or service is referred to as purchase intention. purchase intentions are a measure of a respondent's willingness to buy something or use a service. the factors studied in this research are lenient policy of return of buyer and trust of buyer with internet decision of purchase. literature review the impact of lenient return policies on product purchase decisions and subsequent returns is investigated in the study by petersen and kumar (2010). he discovered that lenient return policies are linked to greater purchase and also greater return rates. lenient return policies, according to wood (2001) and wang (2009), boost purchasing without increasing returns. when compared to the restricted return policy, the lenient return policy increased buying but did not result in higher return rates as per wood (2001). similar results were reported by wang (2009), who discovered that lenient return policies boosted initial purchase decision but not return rate. janakiraman et al. (2015) discover that return leniency has a direct beneficial impact on purchase and return behaviors. the mediating processes that explain how returns interpret to purchase intentions, however, are less well understood, according to their meta-analysis. a clear and acceptable return policy, according to rogers and tibben-lemke (2001), is one of the most essential instruments for attracting consumers. consumers who have made purchases from an online vendor in the presence of a product return (returned experienced customers), according to qureshi et al. (2009), would repurchase from such vendors. when it comes to internet shopping, trust is crucial. consumers cannot personally verify the goods, which lead to trust difficulties in internet purchases. consumer trust increases online purchasing decisions significantly accordingly mahliza, febrina. (2020). problem statement as per the preceding literature available it is clear that return policy and customer trust are severe points of concerns for seller. due to great competition, it is very difficult to retain customer which can be only possible by providing beneficial service like good return policy so this will https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 32 simultaneously develop customer trust in us. this will lead to greater return and customer will come again for repurchase. research objective research objective is to find if there is positive association among of lenient policy of return of buyer and trust of buyer with internet decision of purchase in supply chain sector of pakistan significance of study this study is essential for the internet purchasing supply chain sector as a whole in order to examine supply chain policy of return dimensions i.e., supply chain return risks derived disruption factor which allows company get stick to one seller. as the internet purchasing supply chain sector as a whole is related to high frequency risk of return dimensions due to the high uncertainty in internet purchasing supply chain environment therefore, examine trust of buyer mediates positive association among of lenient policy of return of buyer and perceived seller quality with internet decision of purchase in supply chain sector of pakistan. research methodology conceptual frame work research approach explanatory research type is used for this research to examine positive association among of lenient policy of return of buyer and trust of buyer with internet decision of purchase in internet purchasing supply chain sector of pakistan. we have used quantitative research approach to find the association among the dependent and independent variable. data collected was changed in to numbers to quantified and tested empirically. sample size and population the sample size, selected for this study is 100. for this study the target population is internet shopper and buyers exist in karachi so it was not difficult to obtain data. statistical techniques this research used the spss software and according to research it is appropriate to run reliability analysis, anova and regression analysis. questionnaire and measurement instrument there are 21 items selected in preparing questionnaire for the dependent and independent variables i.e., lenient policy of return of buyer, trust of buyer, and internet decision of purchase. online return policy leniency consumer trust online purchase decision https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 33 each, the variables carried 7 items and is adopted to examine the impact of lenient policy of return of buyer and trust of buyer on the internet decision of purchase. hypothesis h1: there is positive association between lenient policy of return of buyer and internet decision of purchase. h2: there is positive association between trust of buyer and internet decision of purchase. data analysis and interpretation demographics gender frequency percent valid percent cumulative percent valid male 61 61.0 61.0 61.0 female 39 39.0 39.0 100.0 total 100 100.0 100.0 it is to be observed out of 100, 61 participants were male which extracted the 61% of the data and there were 39 female participants which extracted the 39% of the data collected. age frequency percent valid percent cumulative percent valid 20-25 yrs 44 44.0 44.0 44.0 26-30 yrs 32 32.0 32.0 76.0 31-35 yrs 15 15.0 15.0 91.0 36-40 years 5 5.0 5.0 96.0 over 50 4 4.0 4.0 100.0 total 100 100.0 100.0 among 100 participants 44 number of participants which extracts 44.0% are belong to the age group of 20-25 years, 32 number of participants which extracts 32% are belong to the age group of 26-30 years, 15 number of participants which extracts 15% are belong to the age group of 3135 years, 5 number of participants which extracts 5% are belong to the age group of 36-40 years, 4 number of participants which extracts 4% are belong to the age group of over 50 years. education frequency percent valid percent cumulative percent valid matric 9 9.0 9.0 9.0 intermediate 17 17.0 17.0 26.0 bachelors 38 38.0 38.0 64.0 masters 35 35.0 35.0 99.0 other 1 1.0 1.0 100.0 total 100 100.0 100.0 https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 34 out of 100 participants 9 (9.0%) of the participants are metric, 17 (17.0%) of the participants are intermediate, 38 (38.0%) of the participants are bachelors, 35 (35.0%) of the participants are masters, 1 (1.0%) of the participants are others. marital status frequency percent valid percent cumulative percent valid married 34 34.0 34.0 34.0 unmarried 66 66.0 66.0 100.0 total 100 100.0 100.0 out of 100 participants 34 (34.0%) of the participants are married, 66 (66%) of the participants are unmarried. reliability analysis variable cronbach’s alpha no. of items orpl internet policy of return leniency 0.891 07 ct trust of buyer 0.915 07 opd internet decision of purchase 0.945 07 over all 0.968 21 the reliability of data obtained is checked through cronbach's alpha test. acceptable range for cronbach's alpha is α of 0.6-0.7 indicates an acceptable level of reliability. the values for reliability test obtained are greater than 0.7. for internet policy of return leniency value is 0.891, for trust of buyer is 0.915 and for internet decision of purchase is 0.945 model summary model r r square adjusted r square std. error of the estimate change statistics durbinwatson r square change f change df1 df2 sig. f change 1 .874a .764 .759 .46465 .764 156.582 2 97 .000 1.980 a. predictors: (constant), ct, orpl b. dependent variable: opd table shows that the independent variables online return policy leniency and customer trust explain 76.4% of variance in the online purchase decision as represented by r square. anova model sum of squares df mean square f sig. 1 regression 67.613 2 33.807 156.582 .000b residual 20.943 97 .216 total 88.556 99 https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 35 a. dependent variable: opd b. predictors: (constant), ct, orpl table shows that our model is significant at α=.05, f (2, 97) =156.582 and p = .000 which is less than .05 coefficient table model unstandardized coefficients standardized coefficients t sig. 95.0% confidence interval for b correlations b std. error beta lower bound upper bound zeroorder partial part 1 (constant) .255 .186 1.372 .173 -.114 .624 orpl .457 .106 .426 4.317 .000 .247 .667 .840 .401 .213 ct .507 .104 .479 4.861 .000 .300 .713 .847 .443 .240 a. dependent variable: opd the table shows that all the predicators are significantly correlated with dependent variable. online return policy leniency is 0.457 that shows significantly positive impact as (sig >0.05) on internet decision of purchase. secondly, customer trust is 0.507 that shows significantly positive impact as (sig >0.05) on online purchase decision. regression model: the regression equation obtained is: y  o  1x1  2x2 + ∈ y  0.255  0.457x1  0.507x2 where y = dependent variable online purchase decision opd o = intercept 1 and 2 = slope x1 and x4 = independent variables online return policy leniency orpl and customer trust ct ∈= residual or error term conclusion conclusively, this research categorically confirmed the impact of the purchasing by internet retailer antecedents i.e., internet policy of return leniency and trust of buyer on internet decision of purchase. evidently, the pakistani purchasing by internet sector in order to investigate antecedents i.e., internet policy of return leniency, trust of buyer on internet decision of purchase factors, which allows buyers get stick to one internet retailing website. as the purchasing by internet sector business interested in high frequency purchasing by internet retailer antecedents due to the high competition. therefore, this research investigates the impact by internet website’s policy of return antecedents in the context of pakistan, which is valid and practically proved. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 36 where, threats of new entrant are increasing day by day. already there is huge competition exist in this sector which getting worse competition for the sake of acquiring maximum buyer i.e., market share in this website retailing domain towards pakistani purchasing by internet sector. for the sake of market share and new buyer attraction and increasing retention buyer rate it is necessary to provide best policy of return in the sector for respective buyer and then attaining trust of buyer which will lead to attract buyer to purchase again and generate higher returns. hypothesis accepted or rejected h1: there is positive association between lenient policy of return of buyer and internet decision of purchase. accepted h2: there is positive association between trust of buyer and internet decision of purchase accepted future recommendation future research can be on role of third-party ict policy of return dimensions i.e., internet policy of return leniency, trust of buyer-on-buyer policy of return with significant mediating effect of buyer satisfaction with provided policy of return in local courier sector of pakistan. secondly, research can be on effect of intermediary’s policy of return factors i.e., speed, responsiveness and timelines policy of return on retailer policy of return with significant mediating effect of retailer satisfaction with provided policy of return in local retailing sector of pakistan. lastly, research can be on impact of third vendor managed inventory policy of return on buyer loyalty with significant mediating effect of buyer satisfaction in local restaurants sector of pakistan. references fang, yulin & qureshi, israr & ramsey, e. & mccole, patrick & compeau, debbie & ibbotson, patrick. (2009). understanding online customer repurchasing intention and the mediating role of trust – an empirical investigation in two developed countries. elaine ramsey. 18. 10.1057/ejis.2009.15. grazioli, stefano & jarvenpaa, sirkka. (2003). consumer and business deception on the internet: content analysis of documentary evidence. international journal of electronic commerce. 7. 93-118. janakiraman, narayan & syrdal, holly & freling, ryan. (2015). the effect of return policy leniency on consumer purchase and return decisions: a meta-analytic review. journal of retailing. 10.1016/j.jretai.2015.11.002. kumar, v. & petersen, j. & leone, robert. (2010). driving profitability by encouraging customer referrals: who, when, and how. journal of marketing j marketing. 74. 117. 10.1509/jmkg.74.5.1. mahliza, febrina. (2020). exploring trust in purchase intention: an empirical research on agricultural application. 10.2991/aebmr.k.200205.015. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 37 rogers, dale & lembke, ronald. (2001). an examination of reverse logistics practices. journal of business logistics. 22. 129 148. 10.1002/j.2158-1592.2001.tb00007.x. wang, xianghong. (2009). retail return policy, endowment effect, and consumption propensity: an experimental study. the b.e. journal of economic analysis & policy. 9. 38-38. 10.2202/1935-1682.2288. wood, stacy. (2001). remote purchase environments: the influence of return policy leniency on two-stage decision processes. journal of marketing research j market reschicago. 38. 157-169. 10.1509/jmkr.38.2.157.18847. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (https://creativecommons.org/licenses/by/4.0) asian finance & banking review 7(1) (2023), 10-16 10 finance & banking review asfbr vol 7 no 1 (2023) p-issn 2576-1161 e-issn 2576-1188 available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/asfbr published by cribfb, usa mobile banking in bangladesh: a policy and regulatory review mohammad rezaul kabir (a)1 md. amzad hossain (b) (a) assistant professor, department of business administration, sylhet international university, and phd fellow, institute of bangladesh studies, rajshahi university, bangladesh; e-mail: rezaul_ru@yahoo.com (b) professor, department of finance, university of rajshahi, rajshahi, bangladesh; e-mail: mdahossain@ru.ac.bd a r t i c l e i n f o article history: received: 2nd april 2023 revised: 28th may 2023 accepted: 20th july 2023 published: 27th july 2023 keywords: mobile banking, financial inclusiveness, policy, regulation, kyc, regulatory index jel classification codes: g21, g28, c83 a b s t r a c t policy and regulatory issues are indispensable for maintaining discipline and protecting the interests of all stakeholders in the mobile banking ecosystem. bangladesh bank has issued mobile banking policy guidelines (2011) and mobile financial services regulation (2018) to protect against abuse of these services like financial fraud, money laundering, and terrorist financing, as well as safeguard user funds. this article examined the role of mobile banking policy and the regulatory framework in creating a favourable regulatory environment for mobile banking in bangladesh. for this purpose, twenty-three kiis and one questionnaire survey were conducted on 400 respondents in the country's four districts. many public and private documents and journal articles were also reviewed. a regulatory policy index for mobile banking with ten indicators was developed, and the overall regulatory index score was 0.85 out of 1. multiple linear regression analysis has also been used in this study. its regulatory index value, beta coefficient, and r-value, as well as expert opinions, asserted that mobile banking regulatory policy standards have positively influenced the creation of a favourable regulatory environment, even though they demand some modification in terms of account opening minimum age, service charge rate, product diversification, interoperability, and supervision of mobile banking activities. since multiple agencies are involved in mobile banking policy and regulation, the government can play a vital role in coordination among the multiple agencies to ensure the protection of customers and financial steadiness through a suitable legal structure. © 2023 by the authors. licensee cribfb, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). introduction policy and regulation are essential drivers for expanding mobile banking products and services by establishing rules and standards that protect consumers, ensure the security of transactions, and promote fair competition among mobile banking markets. customers want to use these products and services with explicit regulatory policy frameworks. government protection in terms of policy and regulation affects consumers' attitudes, and it would have to increase confidence and trust in mobile banking transactions. the regulatory framework influences the customer's demand, develops a high-quality agent network, builds infrastructure, and designs products beyond actual payments (osafo-kwaako et al., 2018; staschen and meaghe, 2018). due to unauthorized financial transactions through mobile banking, the policy and regulatory frameworks have become more concerning at national and international levels. the bangladesh bank has made separate mobile financial policy guidelines to regulate the mobile financial market. consequently, the policy guideline has become the name of the bangladesh mobile financial services regulation 2018. this study examined the role of the present mobile banking regulatory policy in enabling enable regulatory environment for mobile banking transactions in bangladesh. the study aims to review the mobile banking policy and regulatory framework. to evaluate the role of mobile banking policies and regulatory frameworks in generating an enabling regulatory environment for mobile banking transactions in bangladesh. 1corresponding author: orcid id: 0009-0002-1521-7133 © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/asfbr.v7i1.2054 to cite this article: kabir, m. r., & hossain, m. a. (2023). mobile banking in bangladesh: a policy and regulatory review. asian finance & banking review, 7(1), 10-16. https://doi.org/10.46281/asfbr.v7i1.2054 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/asfbr.v7i1.2054 https://orcid.org/0009-0002-1521-7133 https://orcid.org/0009-0008-8040-3243 kabir & hossain, asian finance & banking review 7(1) (2023), 10-16 11 the study described the introduction, literature review, objectives, and methodology. then review the mobile banking policy and regulations. draw the mobile banking regulatory relative index and carry out the regression analysis. lastly, it presents the conclusion, findings and suggestions. literature review the regulatory policy framework is essential to customer protection and supports minimizing risk, essential to stabilizing financial inclusion. the national financial inclusion strategy of bangladesh (nfis-b) has been reviewed and found that transformative power has been given to service providers for offering diversified products and services, including payments, savings, insurance and credit. possible regulations will impose structural rigidities related to administrative, documentation, reporting, and auditing aspects of village savings and loans. they found from the survey results that the consumer lack preparation in terms of legal, accounting, and financial knowledge in terms of administrative skills to embrace, to adapt to any possible regulation (chowdhury et al., 2021). the major constraints of bangladesh's mobile banking regulatory policy include excessive service fees, regulation of transaction ceiling, fraudulent practices, lack of interoperability facilities, and monopoly of service providers. therefore, policymakers and regulators, including the bangladesh bank, should consider the above findings to improve mobile banking services in bangladesh (amin, 2021). the authorities should anticipate the risks associated with mobile banking and concentrate on preserving the sector's expansion by preventing unauthorized groups from subverting their restrictions (weber & darbellay, 2010). ondiege (2015) conducted a study to understand better how the regulatory environment affects the expansion of financial inclusion through digital techniques like mobile phone payments in african nations, including kenya, nigeria, tanzania, and uganda. it then examines the various laws that have impacted the expansion of financial inclusion through mobile financial services in the four countries. regulators must address concerns, including enhancing helpful regulatory frameworks, creating financial infrastructure, and running financial literacy initiatives. developed and developing countries understand the importance of these issues and have made separate mobile banking regulations to monitor and control their activity. many countries have made separate m-banking regulations, namely afghanistan, brazil, cambodia, india, indonesia, kenya, malaysia, philippines, south africa, and uemoa, which has emphasized aml, cft, and kyc issues in its transaction process (lyman et al., 2008, tarazi & breloff, 2010). policy regarding mobile money is now being addressed in latin american countries. this policy emphasizes to develop of a legal framework from three main mobile banking concerning issues: first, the financial risk associated with these kinds of operational processes; second, to regulate the adherence of legislation concerning money laundering and terrorism financing; and finally, to protect consumers from fraud on behalf of the system administration, as well as to protect personal private data (groppa & curi, 2012). while kenya chose a liberal policy structure that encourages the proliferation of m-payments in a non-banking system, ecuador adopted a state-controlled framework, while brazil is defining its mobile money system within the banking system (groppa & curi, 2012). regulatory decisions and their implications influence the total mobile financial ecosystem. a favorable regulatory policy and an efficient monitoring system would help to expand mobile financial services among marginalized people. the regulation has a positive impact on financial inclusiveness if this regulation is well-managed, properly utilized, and monitored. there is some evidence from the study report of some countries that regulations allowing a more straightforward account opening process for new mobile banking accounts enhanced the more extensive adoption of mobile money and increased financial inclusion in india, sri lanka, pakistan, and bangladesh (di castri, 2013; sultana, 2014). moreover, other scholars stated that the increase in m-banking in kenya is due to a friendly regulatory policy (gichuru et al., 2021; mas & radcliffe, 2010, omwansa, 2009, porteous, 2006). itu adds that m-pesa's early uptake results from the regulatory framework's flexible openness. it is limpid that the regulatory framework is a vital factor for the success of mobile banking. the empirical research has been done on 22 nations and found that the legal framework is important to the success of mobile banking (evans & pirchio, 2014). on the other hand, the lack of proper implementation and strictness of mobile banking regulations have created barriers to the financial inclusion of mbs. the inappropriate regulation stands for constraints for the development of mbanking in any context (porteous, 2009). other evidence from studies report that strict identification requirements for opening new mobile bank account led to the exclusion of financially excluded individuals from the market, such as lowincome or migrant workers, and impeded the expansion of mobile banking services in several countries like african countries, including south africa as well as in indonesia and the philippines, (makulilo, 2015; stapleton, 2013, prochaska, & brix, 2008, anarfo, 2020). the lack of coordination among multiple stakeholders of mbs and regulators has created one of the biggest barriers to the progress of mobile banking (porteous, 2009). porteous mentioned that a standard-enabling legal and regulatory environment is one where there is a high degree of openness and certainty. porteous has developed a mobile banking regulatory index of 35 countries, and bangladesh has taken the 32nd position among the 35 countries; bangladesh has a low-level degree of openness and certainty in the regulatory environment (porteous, 2006). the gsma also has introduced another mobile money regulatory index by reviewing more than 80 countries prevailing mobile banking regulations, based on six broad enabling dimensions of mobile banking regulations like authorization, consumer protection, transaction limits, kyc, agent network and infrastructure, and investment environment. bangladesh's mobile banking regulatory index score stood at 70.70, which is relatively lower than many other countries. even among eight south asian countries, bangladesh has ranked seventh on the index score (bahia et al., 2022). since some social groups could not keep up with the pace of fintech, introducing new technology-based financial inclusion policies could not alleviate financial exclusion. the "more technology, more financial inclusion" strategy has not always worked well, so financial inclusion policies must be changed to incorporate the ideas of digital literacy and access to mobile financial services as well (dostov et al., 2019). kabir & hossain, asian finance & banking review 7(1) (2023), 10-16 12 materials and methods population the populations in this study are all active users of mobile banking services scattered all over the country. according to the bangladesh bank payment department, there are 5,737,400,000 mobile banking service active users (bangladesh bank 2022). sample area selection a multi-stage random sampling method has been incorporated into this study for selecting the sample area. four districts (dhaka, sylhet, kurigram, and pirojpur) from four greater divisions (dhaka, chittagong, rajshahi, and khulna) have been randomly selected. then, at randomly four upazilas (keranigonj, south surma, ulipur, and nojirpur) from four districts and randomly four unions (rohiatpur, borakandhi, durghapur, and mativhanga ) from four upazilas were selected. sample unit selection the respondents were first divided according to the homogeneity of each occupation: small business owners, marginal farmers, garment workers, domestic workers, tea labourers, homemakers, and students. the ultimate individual respondent has been selected based on a systematic random sampling method. additionally, twenty-three key informant interviews (kii) have been undertaken by judgment sampling. sample size the sample size for over a million individuals should be at least 384 with a 5% margin of error (saunders et al., 2009). moreover, the sample size should be at least 300, with 500 being very good and 1000 being great (tabachnick & fidell, 2007). the participants in this study were mobile banking account holders who use mobile banking services. the researcher targeted a sample size of 384 to 450 participants for this study, and based on the explanation above, the sample size acquired in the current study is 400. data collection tools primary data have been used in this study. a questionnaire survey, key informant interview, and document review have been used in this study. side by side, reviewing many mobile banking public and private documents. data analysis the data has been analyzed using statistical package for social science (spss) version 22. descriptive analyses (da) have been carried out to understand better the sample overview, the data and its distribution, the missing variables, and the data outliers. moreover, statistical tools like mean, standard deviation, t-test, and multiple linear regression models have been incorporated to test the hypothesis. hypothesis development properly implementing its policy and regulation would make a favorable regulatory environment for mobile banking transactions. the favorable regulatory environment ensures security and increased customer trust, influencing users to adopt mobile banking transactions. an empirical study shows the link between a positive regulatory environment and a thriving mobile banking industry. the 2017 world bank global findex survey stated that a favorable regulatory environment, as assessed by the mmri, is strongly associated with higher mobile banking adoption (kalvin et al., 2022). it has also been found that mobile banking regulation and usage are highly correlated (kalvin et al., 2022). the adequate legal and regulatory framework mitigate the security risk of mobile banking transactions (finconet, 2018). ho: there is no positive association between mobile banking regulatory policy and enabling regulatory environment for mobile banking transactions. h1: there is a positive association between mobile banking regulatory policy and enabling regulatory environment for mobile banking transactions. results and discussions respondents demographic analysis appendix 2 contains the demographic data of the respondents. there were 53% rural and 47% urban respondents, with 68.75% men and 31.25% women. the age group of 26–35, which accounted for 39.50% of all respondents, was followed by that of 18–25, which accounted for 27.25%, and that of 36–45, which accounted for 21.75%.twenty per cent of respondents who used mobile banking were illiterate. illiterate to hsc-passed users account for 86.5%. 39% of those polled made between 1,000 and 20,000 taka per month. the respective income ranges stated by 25% and 19% of respondents were tk 1000–10000 and tk 21000–30000. respondents are divided into twelve occupational groups mobile banking regulatory policy relative index by using user’s perception this section presents the user's perceptions regarding these services' policies and regulations in bangladesh. the five-point likert scale measurement has been used to conceptualize the mobile financial user's perception of this issue. a questionnaire survey in four districts was used to collect information from 400 users of mobile financial services. during the survey, respondents were asked to assess their degree of agreement with the following mobile financial services regulatory policy statement by indicating: (5) strongly agree (sa), (4) agree (a), (3) not agree or not disagree (nda/na), and (2) disagree (da) (1) strongly disagree (sda). the results are tabulated below using the following relative index model. kabir & hossain, asian finance & banking review 7(1) (2023), 10-16 13 𝑀𝐵𝑅𝑃𝑅𝐼 = 𝑊 𝐴𝑁 𝑀𝐵𝑅𝑃𝑅𝐼 = 5𝑛5 + 4𝑛4 + 3𝑛3 + 2𝑛2 + 1𝑛1 𝐴 ∗ 𝑁 where mbrpri= mobile banking regulatory policy relative index n5 = number of respondents of strongly agree. n4 = number of respondents of agree. n3 = number of respondents neither agree nor disagree. n2 = number of respondents of disagree. n1 = number of respondents of strongly disagree. a= higher value n= total number of respondents table 2. mobile banking regulatory policy relative index sda score da score nda/na score a score sa score total score index score the present mb regulatory policy allowed the diversified banking products and services. 7 4 66 952 655 1684 0.84 the present mobile banking policy and regulation has digitized and simplified the kyc process for opening a mobile bank account. 2 4 27 976 715 1724 0.86 the present mb regulatory policy simplify the agent requirement process and ensure the agent availability. 3 4 36 1016 645 1704 0.85 the present mobile banking regulation ensure supervision and control of this services and agents activities. 5 2 24 904 800 1735 0.86 transaction limit policy for individual users reduced the abuse of this services. 12 16 69 920 635 1652 0.82 the mobile banking regulation 2018 and digital security law 2018 properly address the aml issues which secure the mobile banking transaction by curving money laundering and terrorist financing and digital money fraud of mobile banking. 15 16 36 900 705 1672 0.83 the present regulation encourage to the victims for taking legal action against the money fraud 11 2 105 808 755 1681 0.84 digital security law 2018 and ict security act 2013, have a provision of punishment for mb illegal transaction, this punishment provision reduce the abuse of mf activity. 3 4 24 868 850 1749 0.87 the present mobile banking regulation increases the customer confidence level about mobile banking transactions. 1 2 45 832 875 1755 0.87 proper implementation of mbs policy and regulation 2018 in generating the enable regulatory environment for mobile banking transactions. 11 6 39 828 780 1664 0.83 average index score 0.847 sources: field survey 2019-2020 table 2 shows the regulatory index indicators value regarding the regulatory environment for mobile banking transactions is examined by using user's perceptions. this index had ten indicators, each with a value greater than 0.82 out of 1. these score values implied that policy and regulation have made for well-diversified mobile banking products and services, simplified the kyc process, made available agent networks, protected consumer transactions, and ensured the privacy of users' financial information. these services' overall average regulatory index value was 0.847, indicating that this regulatory policy has created a robust enablement regulatory environment for mobile banking transactions. explanation of the correlation correlation analysis assists in determining the link between the dependent variable and each independent variable. this study's dependent variable, "mobile banking regulatory environment," has a positive relationship with the independent factors of mobile banking regulatory policy. this finding suggests that these factors are more likely to influence the dependent variable. the correlation value for all variables is less than 0.7. it means that the variable set has no multicollinearity, and all variables have separate effects and significance. table 3. pearson correlation mbpr1 mbpr2 mbpr3 mbpr4 mbpr5 mbpr6 mbpr7 mbpr8 mbpr9 mbpr10 mbpr1 1 0.095 0.277 0.260 0.618 0.058 0.066 0.011 0.101 0.229 mbpr2 0.095 1 0.514 0.36 0.154 0.284 0.247 0.142 0.235 0.133 mbpr3 0.272 0.514 1 0.525 0.356 0.253 0.394 0.175 0.276 0.187 mbpr4 0.26 0.36 0.525 1 0.311 0.223 0.261 0.181 0.24 0.252 mbpr5 0.618 0.154 0.356 0.311 1 0.117 0.089 0.013 0.106 0.284 mbpr6 0.058 0.286 0.253 0.223 0.117 1 0.515 0.365 0.272 0.099 mbpr7 0.066 0.247 0.394 0.261 0.089 0.515 1 0.336 0.277 0.123 mbpr8 0.011 0.142 0.175 0.181 0.013 0.365 0.336 1 0.167 0.094 mbpr9 0.101 0.235 0.276 0.24 0.106 0.272 0.227 0.167 1 0.261 mbpr10 0.229 0.133 0.187 0.252 0.284 0.099 0.123 0.094 0.261 1 kabir & hossain, asian finance & banking review 7(1) (2023), 10-16 14 report of the model summary r = 0.626 implies a substantial positive association between the independent and dependent variables. r2 = 0.392 indicates that the regression model can account for 39.2% of the variation in the dependent variables. the adjusted r2 value of 0.37, or 37.8%, shows that adding the other independent variables would not significantly explain the dependent variable's variance. table 4. model summary model r r square adjusted r square std. error of the estimate 1 .626a .392 .378 .60133 a. predictors: (constant), mbpr1, mbpr2, mbpr3, mbpr4, mbpr5, mbpr6, mbpr7, mbpr8 andmbpr9 hypothesis testing the anova table gives us a significance level of.000. because the calculated f value (27.936) is higher than the critical f value at a 5% significance level. this conclusion suggests a substantial link between the dependent and independent variables. as a result, mobile banking promotes a positive regulatory environment impacted mainly by independent factors. this observation lends credence to the rejection of the null hypothesis. the acceptance of the alternative hypothesis shows the rejection of the null hypothesis. table 5. anovaa model sum of squares df mean square f sig. regression residual total 90.914 141.024 231.938 9 390 399 10.102 .362 27.936 .000b a. dependent variable: (mbpr10) proper implementation mbs policy and regulation 2018 would ensure the enable environment for mobile banking transaction. regression of coefficient among the nine independent variables regarding mobile banking policy and regulation, it found from the below coefficient table 3 that mbpr1 (.00), mbpr4 (.00), mbpr9 (.008), and mbpr3 are highly significant than the other five independent variables. it has been clear from the above analyses that the mobile banking regulatory policy is highly responsible for creating enable regulatory environment for secure mobile banking transactions. table 6. beta coefficients beta coefficients model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 mbpr1 mbpr2 mbpr3 mbpr4 mbpr5 mbpr6 mbpr7 mbpr8 mbpr9 (constant) 1.41 3 .358 3.951 .000 the mobile financial services offered diversified banking products and services. 0.46 .050 0.43 9.11 .000 the present mobile banking policy and regulation has digitized and simplified the kyc process for opening a mobile bank account .067 .069 .054 .976 .330 the present mb regulatory policy simplify the agent requirement process and ensure the agent availability. .072 .056 .062 2.274 .203 the present mobile banking regulation ensure supervision and control of this services and agents activities. .573 .044 .575 12.994 .000 transaction limit policy for individual users reduced the abuse of this services. .037 .061 -.030 -.606 .545 the mobile banking regulation 2018 and digital security law 2018 properly address the aml issues .007 .063 -.005 -.106 .915 the present regulation encourage to the victims for taking legal action against the money fraud. .008 .056 -.006 -.142 .887 the provision of punishment for mb illegal transaction reduce the abuse of mb activity .026 .056 .020 .459 .646 the present mobile banking regulation increases the customer confidence level about mobile banking transactions. 0.40 0.39 0.45 4.042 .008 a. dependent variable: (mbpr10) proper implementation mbs policy and regulation 2018 would ensure the enable favorable environment for mobile banking transaction. conclusions a supportive policy and regulatory system are essential for propelling these services. consistent with national financial inclusion strategies, the country has developed mobile banking policy guidelines and regulations to ensure a favorable legal kabir & hossain, asian finance & banking review 7(1) (2023), 10-16 15 environment to attain the sustainable financial inclusion goal. the mobile banking regulatory policy balances the mobile money market by ensuring the safety, security, availability, and accessibility of these services to all users. the mobile banking regulatory index value, regression analysis results, and expert opinions supported the idea that the present regulatory policy can create an enabling regulatory environment for mobile banking transactions. the present regulatory policy implementation increased customer confidence levels and made mobile banking transactions more stable, which led to financial inclusion in bangladesh. however, this study has some limitations regarding the sample size, data collection methods, and analysis. the 400 sample respondents did not represent all occupational groupings. in-depth interviews and focused group discussions were not utilized in this study. additionally, quantitative analysis was performed using solely user perceptions. these limitations open the door for future research. therefore, future research can include more research areas, a larger sample from more occupational groups, and use fgd and idi as data collection tools to obtain reliable and accurate results. author contributions: conceptualization, m.r.k. and m.a.h.; methodology, m.r.k. and m.a.h.; software, m.r.k.; validation, m.r.k. and m.a.h.; formal analysis, m.r.k. and m.a.h.; investigation, m.r.k. and m.a.h.; resources, m.r.k. and m.a.h.; data curation, m.r.k.; writing – original draft preparation, m.r.k. and m.a.h.; writing – review & editing, m.r.k. and m.a.h.; visualization, m.r.k. supervision, m.a.h.; project administration, m.a.h.; funding acquisition, m.r.k. and m.a.h. authors have read and agreed to the published version of the manuscript. institutional review board statement: ethical review and approval were waived for this study, due to that the research does not deal with vulnerable groups or sensitive issues. funding: the authors received no direct funding for this research. acknowledgments: we would like to acknowledge all faculty members, staffs and fellows of institute of bangladesh studies (ibs) at rajshahi university, each of whom has provided advice and guidance throughout the research process. thanks all for your unwavering support. informed consent statement: informed consent was obtained from all subjects involved in the study. data availability statement: the data presented in this study are available on request from the corresponding author. the data are not publicly available due to restrictions. conflicts of interest: the authors declare no conflict of interest. references anarfo, e. b., & abor, j. y. 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(2010). legal issues in mobile banking. journal of banking regulation, 11, 129-145. https://doi.org/10.1057/jbr.2009.16 publisher’s note: cribfb stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2023 by the authors. licensee cribfb, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). asian finance & banking review (p-issn 2576-1161 e-issn 2576-1188) by cribfb is licensed under a creative commons attribution 4.0 international license. https://doi.org/10.3362/1755-1986.2008.004 https://doi.org/10.1080/00074918.2013.850633 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ contents asian finance & banking review vol. 1, no. 1; 2017 issn 2576-1161 e-issn 2576-1188 published by centre for research on islamic banking & finance and business 83 an empirical research on shinepukur holdings ltd: strategy, accounting, ratio, sensitivity and prospective analysis k. m. anwarul islam1 1department of business administration, the millennium university, dhaka, bangladesh correspondence: department of business administration, the millennium university, dhaka, bangladesh, e-mail: ai419bankingdu@gmail.com received: october 03, 2017 accepted: october 17, 2017 online published: october 30, 2017 abstract this paper examines how shinepukur holdings ltd is going well or not? the major operations of the company are related to the development of lands and building apartments. its operating performance is now going down because of the inefficient strategy formulation. the company cannot use its resources in full swings. real estate customers purchase land or apartments on credit. sometimes they fail to pay with in due time. identifying the projects which customers will pay their credit within short term is important in this business. this policy is not followed by shinepukur. moreover managers had taken some unprofitable projects which brought negative return for the company. the company’s core businesses are apartment project and land project. competition in real estate industry is increasing day by day. after du-point analysis, we have found that company’s performance is very much sensitive to its profit margin. in the valuation part we have found the company’s present of equity per share is negative where share market price is 28.50 taka in the last trading day of 2015. this figure indicates market price of share is overvalued. investors should not buy this company’s share. in prospectus analysis we have made forecast for next three years income statement, balance sheet, cash flow statement on the basis of common size statement analysis. keywords: strategy analysis, accounting analysis, ratio analysis, sensitivity analysis, prospective analysis. 1. introduction shinepukur holdings belong to service industry. it was incorporated in 1979 in the name of shinepukur jute spinners ltd. in 1995 the company extends its business in real estate business. in this report we have analyzed the performance of real estate business operated by shinepukur holdings ltd. the company develops land and builds apartments, shopping malls and office complex for sale. it also deals in land. 2. literature review in this article, thachappilly (2009a) discusses financial ratio analysis and its use for performance evaluation. there is typically a goal in doing business analysis: the need to make sense of the extremely large amounts of numbers shown in corporate financial statements. an empirical research on shinepukur holdings ltd: strategy, accounting, ratio, sensitivity and prospective analysis k. m. anwarul islam 84 it's meant to be a tool to help investors judge the success of a firm, so that they can make an investment decision. these examples show us how we can analyze different kinds of ratios using different methods on diverse subjects like profitability, liquidity, debt, performance, and investment appraisal. thachappilly (2009b) is focused on talking about the profitability ratios measures such as gross, operating, pretax, and net profits, as well as the return on assets, roa ratio, roe ratio, and roce ratio. while making this determination, he ascertains that the gross profit is the profit earned by the sales value of products over the costs of items sold. in other words, he's saying he was talking about gross profit margin: gross profit/net sales or revenue. r&d and marketing expenses are deducted from gross margin to arrive at operating profits. jenkins (2009) came on strong, a better picture of a company's financial outlook can be obtained through the proper application of financial ratios and procedures. his belief is that fixed cost and variable cost are the most essential factors. fixed costs are those costs that are always present, regardless of the amount of product or service sold. the costs that do not change are called fixed costs. these can include rent, insurance, and personnel pay. variable costs include expenses that rise or fall depending on sales volume. nursing researcher colaizzi's (1978) method of descriptive phenomenological data analysis. method: to illustrate colaizzi's process of extraction, organization, and analysis, an actual research study using the colaizzi method was employed. some statistical discussions use causal analysis jargon, which goes back to rubin (1974). the ideas themselves are fairly simple. in the absence of randomization, observational studies seek to discover how a certain factor impacts a situation. differences in the dependent variable cannot necessarily be attributed to the hypothesized cause, because the researcher is unable to randomly assign persons to smoke. thus, in observational research, alternative procedures must be used to ensure that the two groups are comparable. some of the standard procedures include regression and matching (covariance adjustment) (nonparametric covariance adjustment). is this literature of interest to those outside of political science? or is it still too early to tell? rosenbaum (2002) argues that research that look at treatments, interventions, or policies and their effects include studies that examine "treatments, interventions, or policies" and that look at the absence of treatment. 3. strategy analysis under this topic we have focused on the real estate industry, shinepukur’s business strategy, competitive strategy and corporate strategy analysis. 3.1 industry analysis analysis of porter’s five factors: force 1: rivalry among existing firms: it reduces the profitability of an industry. (i) industry growth rate: service is a high growth industry. demand of the products of this industry is increasing day by day. number of peoples with high level income is increasing and they are choosing product of this industry. this growth is not stagnant. so the industry is profitable. (ii) concentration and balance of components: eastern housing is the leader of this industry. but now there are many private firms in this industry. they invest a large amount of capital in this industry. their brand names are also recognized by the customers. the type of competition among firms is not limited to only price but also in the area of product quality, location of the product, handling time, land acquisition rate and credit facility. an empirical research on shinepukur holdings ltd: strategy, accounting, ratio, sensitivity and prospective analysis k. m. anwarul islam 85 o (iii) degree of differentiation and switching cost: customers of this industry mainly focus on two things 1) position of the product 2) price of the product. product of this industry is highly differentiated. for example: a customer firstly goes to search for the length of the product like 1200square feet, 1800square feet or number of rooms. then he searches for the location of the plat; gulshan, danmondy etc. and after it price of plat comes on. the switching cost for the customers is high in this industry. for example price of 1200square feet and 1500square feet is very different and the price does not vary too much in different firms for 1200 square feet product in the same location. so price competition is less in this industry for high switching cost. (iv) excess capacity and exit barriers: capacity of service industry is large than the customers demand. so firms cut price to fill the capacity. firms main inputs are land, raw materials, human capital etc. assets of firms are not too much specialized. so any firm can easily go out of this industry. force 2: threat of new entrants: the new entrant in service industry is very much easy. it reduces the total profitability of the industry. (i) economics of scale: the economics of scale is not high for this industry. some private firms like navana or asset development companies acquire a piece of land and construct an office building, shopping mall or flat. on the other side some companies like al amin group or eastern housing acquire a large area and sale as plot. the economics of scale is not much more different for these two kinds of firms. there are already 220 firms listed in rehab within some years. this increasing rate of registration is a direct threat to our company shinepukur holdings. (ii) first mover advantage: eastern housing is the first player in service business. it earned a large amount of profit in the first several years. now there are five public and 218 private companies under this industry. (iii) legal barriers: some legal restrictions are preventing the profitability of this industry. one of the major barriers is that government has forbidden building on low land after restructuring the land. this barrier hampered the business very much. because outside the city area many vacant lands are low. the only way to build a structure on this low land is by filling the land. if the rule is unchanged the profitability of this sector will go down with in some years. force 3: threat of substitute products: in housing business the meaning of substitute is to build building, office or home individually. if the price or location is not attractive to the individuals, then he can purchase a land and build a building and rent the building for any type of use. the substitute product to a flat customer is to live in a rented house. force 4: bargaining power of buyers: (i) price sensitive: buyers of this industry are not too much price sensitive because the product is differentiated by location like gulshan, uttara .the price of the product in two different location must be different and customer are careful about it. the switching cost is high for this industry. (ii) relative bargaining power: there are many development firms in the housing business. and the number of customers also significant. in reality the bargaining power of customers is low because industry’s product prices are not two much different among existing firms. customers are not interested to substitute product (building own building) because it is difficult in our country’s situation. to get a pure land and a developed land with an empirical research on shinepukur holdings ltd: strategy, accounting, ratio, sensitivity and prospective analysis k. m. anwarul islam 86 communication. the facilities given by firms are more attractive to customers rather than build an own building. communication facility, security system, drains facility and payment system is better if the product is bought from a reputed firm of this industry. so the bargaining power of customers is low. force 5: bargaining power of suppliers: there are three factors of production in housing industry. a) land b) raw materials c) intellectual persons. in case of land bargaining power of suppliers is high, because there are many buyers for land. bargaini ng power of suppliers of raw materials is low in some cases and high in some other cases. (i) the threat of substitute product is the main critical factor for the profitability of this service industry. because the substitute of real state product is not so attractive to customers. the substitute means individually building home on purchased land. (ii) yes, the industry is capable of retaining the profit it has been making if the price is reasonable to the customers and if the players of this industry diversify its credit facility. 3.2 competitive strategy analysis at the present time shinepukur holdings ltd. is loosing its growth of profitability because of unstructured strategy. there are two main strategies existing in the market. one is cost leadership by supplying same product at low cost, economics of scale and efficient production design. second is product diversification by supplying a unique product, more flexible delivery, investing in brand image, investing in research and creativity. shinepukur may not survive or prosper in its given strategy because its product is not unique or differentiated from the market product and it couldn’t achieve the cost leadership in production. the main reason of this failure of the company is that it didn’t concentrate in real state business alone it also concentrating in just business. shinepukur should change its strategy to operate the real state and jute business by with a single entity. it should achieve cost leadership in the real state business. and should focus on only one business like real state business. it should increase investment in brand image. these activities can only make it profitable in service industry. 3.3 corporate strategy analysis shinepukur holdings ltd. operates jute, real estate and ceramic business. it is also thinking to involve in hotel business. it holds different strategies for different sectors. but the main strategy is to simultaneously operate unrelated businesses. investment  shinepukur holdings ltd. invests 85.682 million taka in international holdings ltd, 2 million taka in international cement ltd,  4 million in shinepukur hotels ltd,  180.2 million taka in beximco ltd, 1 million taka in cdbl. hotel project company is planning to build a hotel in front of hotel sheraton. the project is under government observation. an empirical research on shinepukur holdings ltd: strategy, accounting, ratio, sensitivity and prospective analysis k. m. anwarul islam 87 z cement factory the progress of this project is now stop because of volatile market makes it extremely risky to invest in this sector at this moment. employees’ relations the managementemployee relations in our company remained supportive of production and conducive to the growth of the company during the year. 4. accounting analysis step: 1: key accounting policies of shinepukur holdings ltd. financial statement preparation: financial statements of shinepukur holdings ltd are prepared under the historical cost convention. revenue recognition: revenue is recognized on accrual basis. valuation of property plant and equipment: the cost of acquisition of an asset comprises its purchase price and any directly attributable cost of bringing the asset to its working condition for its intended use inclusive of inward freight, duties and nonrefundable taxes. depreciation on property plant and equipment: office equipment 15% transport and vehicle 10% furniture and fixtures 10% sundry assets 20% inventory treatment inventories are stated at the lower of cost and net realizable value. the cost is calculated on weighted average method consistently. net realizable value is based on estimated selling price less any further costs expected to be incurred to make the sale. taxation: both current tax and deferred tax has been provided. 2011 35% 2012……………30% 2013……………30% 2014……………30% 2015……………30% leases assets leased under agreements qualifying as operating lease. hence, lease rentals are expensed as incurred. borrowing cost interest and other costs incurred by the company in connection with the borrowing of funds are recognized as an expense in the period in which they are incurred unless activities that are necessary to prepare the qualifying asset for its intended use are in progress. an empirical research on shinepukur holdings ltd: strategy, accounting, ratio, sensitivity and prospective analysis k. m. anwarul islam 88 step 2: assess accounting flexibility the existing accounting policies and estimates of shinepukur holdings ltd are not informative enough for the investors to take the decision to invest in this company. accounting personals have the flexibility to change the estimate in inventory, depreciation; profit participation fund, dividend payment etc. but sudden change in these factors can reach wrong information to its shareholders. step 3: evaluate accounting strategy the company is following the rules as adopted by the institute of chartered accountants of bangladesh. it is following conservative accounting strategy for revenue and liability recognition. step: 4: evaluate the quality of disclosure the quality of disclosure of shinepukur holdings ltd is moderate. it should disclosure some items more clearly to understand the real position of the company’s operation. managers should give more attention in this area. step 5: potential red flags  the interpretation of inter unit loan has not been given properly.  purchase and disposal of fixed assets should be explained more clearly.  company is not paying dividends.  earning per share is very low in the last year. 5. ratio analysis internal liquidity ratio current ratio: the time series analysis of current ratio is showing that the ratio has a declining trend. it means that the company’s ability to meet up the current obligation is declining year by year. the reasons behind this decline are as follows  decrease in advance income tax paid  decrease in inventory for low production  high growth in accrued expenses  current maturity of long term debt  liability due to associated undertaking quick ratio: after deducting the inventory from the current assets we have found these quick ratios for the last four years. this is also showing a declining trend. it means that the sensitivity of inventory change is not important to the company. inventory turnover: the inventory turnover ratio for the last four years is almost stable. the companies can make strong advertisement and price discount to make low its inventory. average collection period: the average collection period for the company of the last four years is gradually increasing. there may be two reasons behind this increase. the first one is that company is enhancing its credit policy. it is giving more times to its customers for payments. second reason is the adverse selection of the customers.  the company’s accounts receivable is increasing year by year where sales are decreasing. an empirical research on shinepukur holdings ltd: strategy, accounting, ratio, sensitivity and prospective analysis k. m. anwarul islam 89  real estate business faces the risk of default by customer. customers pay a down payment at the beginning of the contract and after it rest amount is paid in installments. for this reason average collection period is longer.  shinepukur holdings should impose low interest rate for early payment to speed up the collection period. operating efficiency ratio fixed asset turnover: the average turnover of sales on fixed asset of shinepukur holdings ltd for the last four years is around 2.55. this turnover indicates amount of taka sales to per taka fixed assets. total asset turnover: the average turnover of sales on total assets of this company for the last four years is around 0 .20. the company is using huge amount of current assets in its operation. it means that company’s one taka asset generating 0.20tk sales. financial risk ratio debt ratio: the company’s current debt ratio is 0.34. this ratio is increasing which means that the company is using more leverage in its operation. debt to equity ratio: debt to equity ratio measures the financial risk that the company bears. the current debt to equity ratio is 0.22. it means that the company’s financial risk is low. it is using more equity in its capital structure.  the company’s long term debt is reduced by 23.17% in last 4 years.  equity increased by 8.57% in last 4 years. time interest earned: the company’s current interest earning ratio is 1.02 which is decreasing year by year. this indicates that the company’s ability to pay fixed interest rate is going down. this a major red flag for the company.  in this situation, shinepukur should reduce its fixed interest bearing debt. operating profitability ratio gross profit margin: the company’s gross profit margin is increasing but at a slow rate. cost of goods sold per one taka sale is being reduced last 2 years. this is happened for efficiently managed the raw material procurement. operating profit margin: after deducting the operating expenses we get operating profit margin. the company’s operating profit margin is not changing significantly due to the unchanged administrative and selling expenses. net profit margin: the company’s current net profit margin is 0.45% which is one third of the previous year.  low difference between ebitda and interest expense is the reason for this low profit margin. roa: in the current income year, 2015 the return on assets has declined at a high rate.  since shinepukur last year’s profit margin was low, return on asset was also low in that year.  low roa means that the assets of shinepukur are not being using efficiently. an empirical research on shinepukur holdings ltd: strategy, accounting, ratio, sensitivity and prospective analysis k. m. anwarul islam 90 e  unproductive assets should sell out. roe: the roe is the most significant parameter to measure a company’s operating performance. since we have used a large portion of equity as our source of fund and generate low return, the company’s return on equity is lower in the year 2015.  roe can be inflated by boosting net profit in discretionary methods. eps: since the roe has declined the earning per share has also declined.  the number of shares increased by 200000 in 2015, when the generated of net profit is low. price/ earnings ratio the company’s recent p/e ratio is 246.28 because of the low earning. our company’s market to price earnings ratio is higher in last 4 accounting year. share price of shinepukur holding is declining for the bad performance of the company. 6. sensitivity analysis sensitivity to profit margin roe is highly sensitive to the changes in the changes in profit margin. we see that the dispersion is 114.65%. that is if there is any change in net earnings, roe is significantly changed. sensitivity to asset turnover now the average change in roe due to change in asset turnover is –7.68% and the dispersion is 10.12%.so roe is also sensitive to asset turnover over the period, but this volatility is not as high as it is in case of profit margin change. sensitivity to leverage roe is least sensitive to the leverage ratio. the average change is .33%, whereas the dispersion is 3.74% 7. prospective analysis valuation of shinepukur holdings ltd the enterprise value of the firm is 857504234 taka and the equity value is -322659191 taka. the firm has a total of 22500000 shares outstanding with a per value of 100 taka per share. the market value per share of the firm is 28.5 taka, which is the market value of the share price of the firm at the last date of 2015. the market overvalues the firm because through our analysis and dcf calculation we find out that the share price should be -1.5 taka only. the company has not been paying any dividend in last some years. so the investors expecting that the company share will be decrease in near future. apart from the dcf valuation model, the probability ratios of the firm further affirms the fact the investors should not put their faith in the firm and have no confidence in it. assumptions  sales will grow up at a rate of -4% in the future.  cogs will grow up at a -4% rate since the company is inventing cost saving formula.  depreciation rate charged on capital xpenditure was 10%. an empirical research on shinepukur holdings ltd: strategy, accounting, ratio, sensitivity and prospective analysis k. m. anwarul islam 91  it is assumed that the company’s inventory will be increased by 6% in future.  accounts receivable will be increased by 6%  other current assets will be decreased by -4% in the succeeding years.  marginal tax rate is 30%  terminal growth rate is 2%  accrued liability will grow down at a rate of 20%.  the cost of equity is 16.5%  cost of debt before tax is 12.26%  wacc is 16.5%  beta of the company is 1.122  risk free rate is 7%  market return is 27%  the dcf calculation is done using the perpetuity method in pro-forma analysis we have forecasted for 2015 and 2016 based on average ratio of individual items to sales of previous three years. some assumptions also have been taken to predict the future value. based on this assumption the accounting figures that we have got are as follows items 2015 2016 net income 17,033,194 (taka) 39,393,082 (taka) gross profit 153,956,283 147,798,031 current assets 3,712,226,061 3,742,245,347 total assets 3,962,592,235 3,982,137,566 current liabilities 496,190,632 476,343,007 total liabilities 1,129,875,858 1,110,028,108 equity 2,832,716,377 2,872,109,458 new funding (0) (0) long term debt 633,685,226 633,685,101 assumptions:  sales growth is -4%  inventory is 281.32% of sales  cogs is 75.28%  average income tax rate is 21.79%  cash is 0.68% of sales of that year  accounts receivable is 47.53%  accounts payable is 13.63%  effective interest rate is 12.42%  dividend payout ratio is 0% of net income  advance income tax payment is 0.11%  accrued expense is 9.23% an empirical research on shinepukur holdings ltd: strategy, accounting, ratio, sensitivity and prospective analysis k. m. anwarul islam 92 8. conclusion the result of financial and pro-forma analysis of shinepukur holdings ltd inform us that the company is not performing well. it is now losing its position in service industry. the company is now taking initiatives to expend its area of business. within some days it will start cement and hotel business. since the company has a moderate band image in the market investors expect that the company will successfully face and retrieve all the financial distortions in the future day. references annual reports, 2007-2016. shinepukur holdings ltd. colaizzi, p. (1978). psychological research as a phenomenologist views it. in: valle, r. s. & king, m. (1978). existential phenomenological alternatives for psychology. open university press: new york. jenkins, l. (2009). contribution margin and breakeven analysis: determining when a company will realize a profit. journal of contribution margin and breakeven analysis, 8, 65-83. thachappilly, g. (2009a). profitability ratios measure margins and returns: profit ratios work with gross, operating, pretax and net profits”. journal of profitability ratio measure margin and return. thachappilly, g. (2009). financial ratio analysis for performance check: financial statement analysis with ratios can reveal problem areas. journal of financial ratio analysis for performance evaluation. rubin, d. b. (1974). estimating causal effects of treatments in randomized and nonrandomized studies. journal of educational psychology, 66(5), 688. rosenbaum, p. r. (2002). overt bias in observational studies. in observational studies (pp. 71-104). springer, new york, ny. http://www.shinepukur.com/ retrieved may 01, 2017 copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. http://www.shinepukur.com/ contents asian finance & banking review vol. 1, no. 1; 2017 issn 2576-1161 e-issn 2576-1188 published by centre for research on islamic banking & finance and business 64 the regulatory framework of e-commerce k. m. anwarul islam1 1department of business administration, the millennium university, dhaka, bangladesh correspondence: department of business administration, the millennium university, dhaka, bangladesh, e-mail: ai419bankingdu@gmail.com received: october 01, 2017 accepted: october 15, 2017 online published: october 30, 2017 abstract the era of globalization requires the efficient use of technologies to cope with the modern world and its features. without technology, no nation can think about take off to development. in the business world development means economic growth and running towards its peak. this peak is attainable only after the appropriate use of unique technologies. technology saves time and mobilizes the economy. electronic commerce is rapidly growing as an impressive manifestation of globalization. the rapid expansion of e-commerce is a major opportunity for local and international trade development of ldcs including bangladesh. this study concentrates only on the regulatory framework of e-commerce. keywords: regulatory framework, e-commerce. 1. introduction the internet has opened up a new horizon for commerce, namely electronic commerce (e-commerce). the internet, through advanced mechanisms of data transfer networks, establishes global linkages between customers and suppliers regardless of geographic location. e-commerce entails the use of the internet in the marketing, identification, payment and delivery of goods and services. it involves order processing at company websites and securing electronic fund transfer (eft) payment systems. e-commerce is a way of conducting business over the internet. though it is a relatively new concept, it has the potential to alter the traditional form of economic activities. already it affects such large sectors as communications, finance and retail trade and holds promises in areas such as education, health and government. the largest effects may be associated not with many of the impacts that command the most attention (i.e. customized product, elimination of middlemen) but with less visible, but potentially more pervasive, effects on routine business activities (i.e. ordering office supplies, paying bills, estimating demand). in 1886, a telegraph operator managed to obtain a shipment of watches that had been refused by the local jeweler. using the telegraph, he sold all the watches to fellow operators and railroad employees and then ordered more. within a short time, he made enough money to quit his job and start his own catalog mail order business. the young man's name was richard sears, who founded sears, roebuck and co. in 1893. electronic commerce, or e-commerce, is the conduct of business by electronic means. following this general definition, e-commerce began soon after samuel morse sent his first telegraph message in 1844, and it expanded across the sea when another message, containing share price information from the new york stock the regulatory framework of e-commerce k. m. anwarul islam 65 market, linked europe and north america in 1858. by 1877, western union, the dominant telegraph company, moved $2.5 million worth of transactions annually. in the twenty-first century, e-commerce referred more specifically to transactions between businesses (b2b e-commerce) and between businesses and consumers (b2c e-commerce) through the use of computer communication, particularly the internet. this form of electronic commerce began in 1968, when what was called electronic data interchange permitted companies to carry out electronic transactions. however, it was not until 1984 that a standardized format (known as asc x12) provided a dependable means to conduct electronic business, and it was not until 1994 that netscape introduced a browser program whose graphical presentation significantly eased the use of computer communication for all kinds of computer activity, including e-commerce. the business-to-business form of e-commerce fared better in 2000 and 2001. although a faltering economy lowered expectations. b2b e-commerce evolved with the development of the internet. one of the leading b2b firms, i2 technologies, was founded in 1988 as a business software producer to help companies manage inventories electronically. as the internet expanded, the role of i2 grew to include the procurement and management of all the elements required to produce finished goods. successful in this endeavor, its revenue grew to $1.1 billion and its profit to $108 billion in 2000. by 2001, electronic commerce had not grown to levels anticipated in the late 1990s. in addition to a decline in economic growth, there remained uncertainties, particularly in relation to the consumer sector. e-commerce has a significant impact on business costs and productivity. e-commerce has a chance to be widely adopted due to its simple applications. thus it has a large economic impact. it gives the opportunity for “boundary crossing” as new entrants, business models, and changes in technology erode the barriers that used to separate one industry from another. this increases competition and innovation, which are likely to boost overall economic efficiency. 2. regulatory framework for e-commerce electronic commerce generates competition, revenue and profit. it also creates flows of goods and services and hence traffic. subsequently, it can act as an incentive for investors to finance locally available infrastructures, connectivity and bandwidth. however, before this ‘virtuous circle’ can be initiated, the ‘magic triangle’ access, trust and know-how – an essential precondition for the start-up and expansion of electronic commerce, must be firmly established between both the public and the private partners involved. this magic triangle can only be set in place if it receives the full and active support from the various stakeholders. figure 1. the magic triangle of e-commerce source: international telecommunications union, millennium, october 1999. geneva the regulatory framework of e-commerce k. m. anwarul islam 66 access to e-technology such as the internet is a necessary but not a sufficient condition for the development and growth of e-commerce. the popularity of e-commerce in any economy will be dependent not only on the cost, efficiency and reliability of internet technology but also on the supportive framework that includes legal and financial infrastructural support as well as support in the form of technical expertise (know-how) 3. regulatory and legal environment to keep pace with the new era of globalization, bangladesh’s legal framework must ensure that appropriate legislative, judicial and administrative processes that support the public interest and private economic rights are in place. however, not much has been done in bangladesh towards achieving that goal. although certain century-old laws are being updated, the only significant legislative changes made in recent years have not proved to be very effective because of weak enforcement or provisions that allow for over-regulation (e.g. the financial loan courts act; the securities and exchange commission act). 4. key macro policies there are two major government documents that reflect the mood of trade and investment policy directions to be pursued in the medium term. these are the five-year plans and the industrial policy. a brief summary of these documents suggests a trend towards an increasing private sector led growth through the promotion of trade and investment. the foreign private investment (promotion and protection) act of 1980 guarantees legal protection to foreign investors against nationalization and also indemnifies them against losses due to civil unrest. it also guarantees repatriation of capital and dividend and equal treatment with local investors. in comparison with the investment regimes in south asian countries, the investment regime in bangladesh attracted only marginal inflows although it is considered to be more open than that of india. for instance, while there are limits to foreign equity participation in india and pakistan, there are no limits placed on foreign equity participation. however, licensing regulations are required by the private sector in energy and telecommunications, which is also applicable in other south asian countries. 4.1 trade and commerce related legislation in the area of foreign trade, the legal framework is primarily governed by three legislative acts: the imports and exports (control) act, 1950; the customs act, 1969; and the foreign exchange (regulation) act, 1947. revisions and updates of these acts are made periodically. the import policy order (ipo) 1997-2002 exemplifies a liberalized trade regime, which accommodates bangladesh’s decision to join the wto. unlike earlier import policy regimes, it does not discourage the import of consumer items. the export policy 1997-2002 aims at promoting exports in the regional and international markets. it calls for the diversification of exports, encouraging backward linkages, simplification of procedures and developing the necessary infrastructure. in january 2000, bangladesh adopted the wto customs valuation system. minimum import process (called tariff value) was used until recently for customs valuation purposes. with the psi system made mandatory in 1999-2000, the system of tariff values has been abolished. the regulatory framework of e-commerce k. m. anwarul islam 67 recently, there have been allegations of misrepresentation of commodities and country of origin. adequate checks and deterrents in the form of fines and other civil and criminal charges are to be put in order to ensure that the psi system is not compromised through cheating, collusion and graft. 4.2 other related regulations other related regulations include the intellectual property rights (ipr) legislation, which dates from the pre-independence era. patents, trademarks, and copyrights are governed by: the patents and designs act, 1911 and the patents and designs rule, 1933; the trade marks act, 1940 and the trade marks rules, 1963; and the copyright ordinance, 1962, as amended by the copyright (amendment) act, 1974, and the copyright (amendment) ordinance, 1978. the agreement on trade-related intellectual property rights (trips) provides standards for intellectual property rights relating to patents, copyright and related rights, trademarks, industrial designs, and layout designs of integrated circuits, undisclosed information, and trade secrets. bangladesh has an eleven-year transitional period (i.e. until january 2006) to meet the obligations under this agreement. the prevailing national legislation requires amendments to conform to the provisions of the agreement on trips. there is also a strong need for developing administrative ability to enforce intellectual property rights. the regulatory framework of e-commerce k. m. anwarul islam 68 the contract law in bangladesh is governed by the contract act 1872. according to this act, cross border contracts are legal. as with the evidence act, a physical signature is necessary to make a contract valid. however, with regard to communication regarding the contract, letters by post and telegrams are acceptable in the eyes of the law. legislation that legalizes digital certificates, electronic contracts, etc should also be enacted. two acts play an important role in dispute settlement cases -the arbitration act 1940 and the money loan court act 1990. the arbitration act governs the settlement of any disputes arising from business transactions. the primary aim of this act is to attempt to resolve the differences of the two parties without having to resort to a court of law. the money loan court (artharinadalat) is an independent judicial body established under the money loan court act 1990 and the money loan court regulation 1990 to recover public money loaned to individuals through public sector financial institutions. the judges for these courts are selected from among the sub-ordinate judges by the government in collaboration with the supreme court and administratively it performs directly under the supreme court. according to the act, money loan courts are supposed to be established in every district in bangladesh, with the provision that if necessary more than one court may be established in a single district. however, so far only a few courts have been established. two articles in the constitution in bangladesh -article 15 and article 18 – state some broad principles regarding consumer protection. article 18 specifically includes raising the level of nutrition and improvement of public health among the state’s primary duties. article 15 can be interpreted as making the provision of basic necessities a fundamental responsibility of the state. the penal code 1860 is one of the oldest existing statutes in bangladesh. certain provisions in this code have direct bearing on consumer rights; some of which have been broadened into separate legislative acts. however, apart from these very broad principles, specific legislation is hard to identify. the meager legislation that does exist is scattered through other acts that are only indirectly related to consumer protection 5. acts and laws related to consumer protection 1. control of essential commodities act 1956 2. pure food ordinance 1959 3. price and distribution of essential commodities ordinance 1970 4. bangladesh drugs control ordinance 1982 5. breast milk substitute (regulation of marketing) ordinance 1984 6. tobacco goods marketing (control) act 1988 7. penal code 1860 8. special powers act 1974 9. dangerous drugs act 1930 10. trade mark act 1940 11. standards of weights and measures ordinance 1982 source: rahman, mizanur, 1994. consumer protection law and the swedish approach. 6. telecommunications: an integral part of e-commerce access, pricing, and the quality of internet services are critically dependent on the status and performance of the telecommunications sector. the telecommunication sector of bangladesh is characterized by poor level of the regulatory framework of e-commerce k. m. anwarul islam 69 penetration (0.4 telephone for every 100 persons, graph 1), high cost to access, $341 connection fees for each telephone, one of the highest in the world, and a lengthy waiting period -average waiting period for a new telephone connection varies from three months to ten years. in recent years the government has demonstrated the need for increased participation of the private sector in the production and delivery of telecommunication services. although the bangladesh telegraph and telephone board (bttb) continues to be a monopoly in providing basic telephone connections, the private sectors involvement in cellular phones and as internet service providers (isp) have been allowed. private sector participation in improving and widening the telecommunication infrastructural facilities has also been accepted. the major body directly affecting the legal and institutional framework of internet development is the bangladesh telegraph and telephone board (bttb). bttb was the regulator until the ministry of posts and telecommunications (mopt) took over that function in 1995. the telegraph act of 1885 in tandem with the wireless act of 1933 had been the governing tool until the national telecommunications policy (ntp98) was enacted in 1998. ntp98 may be considered the first step toward reforming the country’s telecom sector. in tandem with the macro trade policy of the 1990s of trade liberalization and increased private sector participation, ntp98 aims at major reforms in the telecommunication sector. with the objective of improving the quality and availability of services, ntp98 emphasizes infusion of technology (e.g. digitalization), greater access across the country, and a competitive framework. to bring about the transformation and to ensure that the objectives of ntp98 are implemented, ntp98 suggests establishment of an independent regulator, bangladesh telecommunications regulatory commission (btrc). however, btrc has yet to become operational. 7. independence of the regulator like in any other sector, independence of the regulator is the essence of telecom and it success in bangladesh. the world bank has been assisting mopt to establish an independent telecom regulator. matheson ormsby prentice solicitor, a dublin-based irish law firm, was hired to prepare the amended telecommunications act in this regard. they finalized the draft in 1998 with the provision of five full-time commissioners. the president of bangladesh, in consultation with the speaker, the chief justice, the prime minister and the leader of the opposition would appoint the commissioners for five years. their appointments may be renewed for another five years or for a shorter term. the president would also appoint a chairman from the five commissioners, who would be the chief executive of the commission. the rank of the chairman would be equivalent to a minister and the commissioners' status would be similar to a deputy minister. they also revoked the president's active role in appointing the commissioners. besides, ministerial status of the chairman and commissioners of the commission was also abolished. they would be appointed by the government and reporting to the minister of mopt. their proposed monthly remuneration of taka 100,000 has also been reduced to taka 17,000 (approximately $300). lately the world bank not only declined funding this us$ 12 million project, but also demanded back us$ 1.5 million, an amount that has so far been disbursed to kick off this project. a stalemate situation has been prevailing in this regard. nip98, similar to policy prescriptions offered in other sectors, faces bureaucratic and political challenges to develop a well-functioning telecommunication sector that would be conducive to telecommunication improvements in general and internet services in particular. the road to establishing a strong and independent regulatory body has been a difficult one. identification and recruitment of qualified senior managers, called commissioners, have experienced the regulatory framework of e-commerce k. m. anwarul islam 70 resistance in terms of compensation packages that may be offered. four years prior to ntp98, private internet service providers (isps) launched the internet. albeit ntp98 acknowledges the critical need for easy and affordable access to internet services, bttb’s pricing and regulatory strategy on isps are restrictive. for instance, until february 2000, the isps were not allowed to choose the very small aperture terminal (vsat) carriers other than the ones recommended by the government (bttb). in addition to paying the standard tariff to the vsat operators or capacity re-sellers, the isps were mandated to pay royalty to bttb. presently isps pay an annual royalty of $3,200 to mopt. also, they are currently allowed to independently deal with the vsat carriers. the fees charged and the earlier restrictions on the selection of vsat carriers contributed to higher pricing for internet consumers, thereby delaying exposure to this technology to many. the government’s undeclared embargo on utilizing this huge idle network has been hindering the growth of the internet in bangladesh. it grossly contradicts the overall objective of ntp98. however, the government’s consent on re-selling grameen phone’s infrastructure would not be sufficient for the growth of the internet (e-commerce) unless accessing the customers’ premises is guaranteed. bttb controls the entire outside plant (osp) or cabling network, which is exclusively copper-based. hence, bandwidth limitation remains as a chronic ailment at the customers’ end. customers seldom get more than 4 kbps due to the extremely poor osp of bttb. while precluding the usage of grameen phone’s optical fiber network, bttb has rolled out digital subscribers line (dsl) services in the name of digital data network (ddn). ddn’s prohibitively expensive pricing has failed to make it popular. the government is yet to allow the private sector’s intervention in enhancing the bandwidth of bttb’s access network. one possible means to overcome the prevailing bandwidth constraints is to introduce multichannel, multi-point distribution system (mmds) or local multi-channel distribution system (lmds) solutions. radio spectrum is still being allocated in accordance with the wireless act of 1933. administering the frequency allocation board with bttb officials and heading this highly technical body with a bureaucrat inherently diminishes the required proactive role of this body. provision of unlicensed spectrum is still prohibited due to the required regulatory guidelines. ntp98, however, as a policy objective, recognizes freedom for exchange of information. mmds and lmds can be a viable alternative in an extremely poor teledensity country such as bangladesh. bttb’s decision to itself offer internet services since 1999 has caused concerns among the private providers. they claim that there is uneven competition since the state telecommunication is exempted from paying necessary fees and royalties to the government. since bttb is also the post, telegraph and telephone (ptt) monopoly, it neither requires any additional investment nor faces any delay on obtaining telephone line for its internet venture. participation of bttb enhances the number of sellers of isp service thereby providing greater choice to buyers. however, uneven competition can discourage private sector participation and investment, thereby reducing competition. despite having four incumbent mobile operators, the mopt has allowed bttb to launch cordless mobile telephony with phenomenal concessions in license fees. mopt has also announced that bttb would be launching another cellular mobile services soon. similar to the isp market, bttb’s unfair advantage may crowd out private sector participation. the regulatory framework of e-commerce k. m. anwarul islam 71 8. voip application: an illustration thousands of bangladeshi workers live in singapore. they make a considerable number of phone calls to friends and families back home. the existing 120 voice circuits between bangladesh and singapore gets congested and the rate of unsuccessful calls start mounting in singapore. since the bangladesh bound traffic is much higher, the singapore telecom (singtel) ends up losing substantial revenue. in may 1999, singtel proposed a win-win solution to bttb. singtel would establish a voip link between the two countries at its own cost followed by reducing 50 percent call charges, as they would be transported over the internet. this would mean great savings for the bangladeshi workers in singapore and the congestion in the satellite circuits would be significantly reduced. it means, more bangladesh bound calls from singapore and bttb making more money from the international revenue sharing agreement with singtel. bttb’s monopoly over the long distance and international voice traffic, however, remains protected by ntp98 until 2000 and 2010 respectively. this has been a consistent impediment for the growth of e-commerce. voice over internet protocol (voip) has proven to be a very important catalyst in promoting e-commerce. several policy reforms aimed at boosting the it sector, eventually contributing to ecommerce development, have been accomplished. the decision to cease bttb’s role as a broker between the isps and the vsat operators in early 2000 was overwhelmingly appreciated by the private sector. it reduced the potential of bureaucratic delays and uncertainties. the government’s recent decision to award an operating license for 300,000 telephones in dhaka will meet much of the unmet demand. discussions between bttb and singapore telecom (singtel) on laying a submarine cable between bangladesh and singapore are progressing well. singtel is expected to invest $140 million in this project. 9. financing and banking mechanism there are three types of export financing in bangladesh: pre-shipment financing in local currency by commercial banks; pre-shipment financing in foreign currency by commercial banks through the export development fund (edf); and back-to-back letter of credit (l/c) facilities. exporters can access credit in local currency from private and nationalized commercial banks at a concessional rate determined by the bangladesh bank (bb). the interest rate policy introduced in 1992, which liberalized interest rate ceilings for all categories of lending except to export, agriculture, and small and cottage industries, permitted individual banks to differentiate interest rates charged to individual borrowers. the interest rate bands for exports have been set in the range of 8 percent to 10 percent since 1994-95. exporters can obtain export credit for up to 90 percent of the value of their irrevocable l/c or sales agreement for a maximum period of 180 days. the export development fund (edf), administered by the bangladesh bank (bb), provides pre-shipment financing for imports of necessary raw materials, spare parts, and packaging materials for exporters of nontraditional items. like other export credits, the time limit for repayment is usually 180 days, extendable to 270 days in exceptional cases. 9.1 letter of credit mechanism in bangladesh, l/c is the predominant legal method of international transactions. lack of real time information on the transactions and goods clearance with the central bank is the primary reason behind the existence of an orthodox payment mechanism such as the l/c. inherent delay of paying the seller by l/c inevitably elevates the price up to 15 percent. exporters of certain products may open “back-to-back” l/cs for the required imports of raw materials the regulatory framework of e-commerce k. m. anwarul islam 72 against their export l/c. these include ready-made garments, specialized textiles, household linen, hosiery, toys, luggage and fashion goods, electronic items, and leather goods. under the inland back-to-back l/c system, local suppliers of raw materials to export industries can also obtain advantageous financing. a number of studies have reported that lack of access to trade financing, caused by a weak commercial banking system and foreign exchange scarcity, has constrained bangladesh’s export expansion. in the mid-1990s, whereas exports accounted for almost one third of industrial output, it received only 9 percent of total industrial financing. the insistence by commercial banks on the use of l/cs for export financing, as well as the existence of interest rate ceilings on export loans, have negatively affected exporters’ access to local credit. on the other hand, indirect exporters are forced to give inter-firm credit for their sales of indirect export items to direct exporters because they do not have the option of sight or advance payments from direct exporters; this seems to be inconsistent with the government’s policy of promoting backward linkages. moreover, it is reported that the users of the back-to-back l/c system may end up paying the extra cost of importing inputs, estimated at 7-8 percent higher than under the normal system. the prevailing l/c system, albeit quite successful, is being considered for replacement in some countries. a contract system (cs) would be introduced which would adhere to safe guards and documentation necessary under the banking regulations. cs is expected to be faster and cheaper to implement, as it would minimize the role of the commercial banks, thereby avoiding certain bank charges and other related fees. banks will be used primarily for transfer of funds, which will be made electronically within 48 hours of the shipment. to make the cs more effective, the means of e-commerce e.g., the web version of necessary documents (original contract and supporting documents), encryption, digital signature, digital identification need to be introduced. the prevailing l/c system can be difficult to implement through e-commerce because of its unavoidable complexities. 9.2 banking mechanism automation and eft in the financial sector: in bangladesh, electronic fund transfer is at an early stage and used on a very limited scale. electronic banking, which is highly dependent on the application of it, has been pioneered by the foreign commercial banks. the local banks are yet to be fully automated. most local banks use computers on a stand-alone basis. the extent of computerization in the local banks is limited to database management and electronic communication (through e-mails) only. a few foreign commercial banks and local banks are offering on-line banking facilities in the form of automated teller machines (atm) and local credit cards. only one multi-national bank is now practicing on-line fund transfer between its branches, and two other local banks are supposed to introduce it within 2001.also, the banks now offering atm facilities have formed a common atm pool. the development of electronic banking within the country as well as outside the country is saddled with various infrastructural, institutional and regulatory constraints. a selected list of these constraints is provided below:  lack of network infrastructure of commercial banks  absence of a centralized clearing system of the central bank  absence of eft legislation  exchange controls are too restrictive to promote e-commerce  absence of a need based business plan for on-line banking  inadequate qualified manpower to set up and maintain the network the regulatory framework of e-commerce k. m. anwarul islam 73 convertibility of the taka: the taka (the currency of bangladesh) has been convertible for current account transactions. consequently, earnings from the trading account are freely convertible into foreign exchange for the importation of goods. retention quota: exporters are at present allowed to retain 40 percent of their f.o.b. export earnings in foreign currency accounts denominated in u. s. dollars, pound sterling, deutsche marks, japanese yen or the euro. international credit cards: restriction on issuance of international credit cards prevails although local credit cards introduced by multi-national banks have become popular in bangladesh. the central bank’s main concern against issuance of international credit cards is flight of capital from bangladesh. however, the central bank has no objection on issuance of a generally accepted credit card, which will be honored by all commercial banks for local use only. regrettably, the network for this type of credit card has yet to be established. illegal cross-border payment: as businessmen are allowed to carry a restricted amount of foreign currency legally, many of them make foreign payments through the illegal – but extensively used – system of “hundi”. the hundi system is based on a basic barter principle. in this system, an individual or even a business in one country can instantaneously transfer funds to another country without the inevitable hassle that characterizes official fund transfer channels. the hundi works through middlemen who ensure that the amounts required by the individual or the business reach the recipient almost instantaneously. when the borrower is assured (through telephone calls or other means) that the recipient is in possession of the loan, he/it then pays an equivalent amount in the local currency to the local counterpart of the middleman. the popularity of this system increases whenever the official rate of international currencies varies significantly from the market rate. the hundi system deprives the government of the much sought foreign exchange reserves. 10. human capital successful application of e-commerce demands not only availability of technology and infrastructural facilities but also a skilled manpower that can appreciate and apply it. bangladesh lacks skilled manpower and knowledgeable managers in the it sector. computers are primarily used for word processing, making presentations, e-mails in selected formal sector business establishments. however, the communication is constrained by the quality of verbal and written communication skills in english, which is mediocre at best, even among university graduates. if bangladesh aims to interact closely with the international markets and seeks growth through exports, improved communication and computer skills among various segments of the society are imperative. a good understanding of the current benefits and future opportunities of e-commerce is essential for the advancement of e-commerce. the lack of knowledge among public officials about the internet and its potential, and their application in e-commerce, significantly handicaps policy reforms in this sector. in the private sector, viable it sector projects fail to obtain financing due to the lack of understanding of the investors. 11. governance and policy implementation constraints regulatory intrusiveness is a way of economic life in bangladesh. ageing laws on patents, trademarks and copyrights; post and telegraphs; land ownership and transfer; and employment have yet to be brought into alignment with modern practices and requirements (the world bank, 1996). in addition to this, bangladesh has an intractable problem of poor governance. this has been manifested in the form of continued involvement of politicians and public officials, often in collusion with the the regulatory framework of e-commerce k. m. anwarul islam 74 private sector, in undermining the rule of law. as a consequence, institutions continue to remain weak and legal and regulatory reforms are difficult to implement. rent seeking activities galore, discouraging competition and promotion of efficiency. the problem of poor governance in conjunction with ambiguously drafted, inconsistently applied, and often contradictory regulations makes the whole process of dealing with the government an experience that most businessmen prefer to avoid. the lack of confidence in secure and flexible business transactions is widespread among the business community. conducting business at the chittagong port (the main port of bangladesh) is comparatively more expensive than anywhere else in the region. the handling charge for a 20 feet container is $640 in chittagong as compared to $220 for colombo, $360 for bangkok and $216 for singapore. one of the main reasons for such abnormally high costs for the port in bangladesh has frequent strikes (hartaals) and arbitrary work stoppages by the trade unions. 12. the hidden cost of service customs clearance and procedures continues to be saddled with delays and allegations of informal payments. the introduction of pre-shipment inspection (psi) agents, and the green channel are steps in the right direction in promoting speedy movement of goods. however, the government’s reliance on customs as a major source of tax revenue and private sector’s attempts to find ingenious means to forego taxes (at times in collusion with custom officials) demands further modernization and improved monitoring systems of the custom authorities. corporate taxes are high and burdensome, because of the hassle involved in dealing with tax authorities – resulting in widespread tax evasion. modest coverage and weak enforcement make corporate taxation a minor contributor to the treasury. in addition, the tax system is not client friendly, appeal procedures are lengthy, and definitions of deductible business expenses are strict and nontransparent. for developing economies like bangladesh, foreign direct investment (fdi) is believed to be critical for much needed capital in infrastructural development, infusion of technology and for accessing overseas markets. acceptance and successful application of e-commerce would enhance the business environment, sending signals to foreign investors that it is becoming easier to do business in bangladesh. 13. conclusion a key reason why e-commerce, especially the business-to-business segment, is growing so quickly is its significant impact on costs associated with inventories, sales execution, procurement, intangibles like banking, and distribution costs. if these reductions become pervasive, e-commerce has the potential to be the application that ushers in the large productivity gains. achieving these gains is therefore contingent on a number of factors, including access to e-commerce systems and the needed skills. however, what is unique about ecommerce over the internet and the efficiency gains is that it promises the premium placed on openness. to reap the potential cost savings. the regulatory framework of e-commerce k. m. anwarul islam 75 references bangladesh e-commerce week. (2013). bangladesh bank and bangladesh association of software and information services (ba-sis) are jointly going to organize a special awareness and promotional campaign through organizing. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. asian finance & banking review 7(1) (2023), 17-22 17 finance & banking review asfbr vol 7 no 1 (2023) p-issn 2576-1161 e-issn 2576-1188 available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/asfbr published by cribfb, usa contribution of csr activities to disaster management in bangladesh: a study on banking sectors md. idris ali (a)1 (a) assistant professor (statistics), department of business studies, north bengal international university, rajshahi, bangladesh; e-mail: idris.stat@gmail.com a r t i c l e i n f o article history: received: 22nd april 2023 revised: 28th june 2023 accepted: 24th july 2023 published: 28th july 2023 keywords: csr, natural disaster, disaster management, banks. jel classification codes: m14, m19, q54 a b s t r a c t bangladesh, facing recurring challenges from natural disasters, necessitates an examination of the banking sector's csr activities in the context of disaster management. no doubt, there are many countries in the world where disaster is a great problem. bangladesh is also a potential disaster country. therefore, this study tries to investigate the role of corporate social responsibility of banking sectors on disaster management. time series data is considered from 2015 to 2021 for this study. in this study, statistical tools like percentage distribution and trend line were performed using excel and spss software. the results disclosed that the health sector contribution of islamic shariah-based banks is greater than that of conventional private commercial banks. following that, state-owned commercial banks and foreign commercial banks make contributions to the health sector. finally, there is no substantial difference in proportion of total csr activity between islamic shariah-based banks and conventional private commercial banks between 2018 and 2021, without other years. the results also found that the amount of percentage of damage of crops, livestock and homestead forestry decrease from 2015 to 2021. the findings stated that the overall percentage of csr activities increased in those years. © 2023 by the authors. licensee cribfb, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). introduction man-made disasters are the result of human activities, whereas natural disasters, including floods, droughts, cyclones, riverbank erosion, thunderstorms, tornadoes, and landslides, stem from the forces of nature (sattar, 2017). the financial ramifications of these disasters are substantial, with a total damage and loss in 2021 amounting to tk. 1,791,988 million. the dhaka division suffered the highest damage and loss at tk. 380,345 million (21.22%), followed by rangpur at tk. 280,593 million (15.66%), and barisal at tk. 235,444 million (13.14%). floods accounted for the most significant damage and loss, totaling tk. 1,010,882 million (56.41%), followed by river and coastal erosion at tk. 268,703 million (14.99%) and cyclones at tk. 255,382 million (14.25%), while landslides had the lowest impact at tk. 6,082 million (0.34%) in 2021. dhaka, rangpur, and barisal divisions were the most affected, with 31.51%, 27.93%, and 15.70% of the total damage and loss attributed to drought, respectively. the dhaka division bore the brunt of flood-related damage and loss at 24.20%, with rangpur at 19.30% and mymensingh at 14.80%, whereas khulna experienced the least impact at 0.40%. due to cyclones, khulna division accounted for 43.74% of the damage and loss, while barisal division accounted for 33.62%. coastal and river erosion predominantly impacted dhaka (34.04%), rangpur (24.54%), and khulna (10.94%). in contrast, chattogram division suffered the most from landslides at 94.41%, with sylhet experiencing 5.60% damage and loss (bdrs2021). against this backdrop, the study aims to facilitate a comparative analysis of csr expenditure across all sectors of the banking industry, shedding light on the sector's impact on disaster resilience and public health. csr has gained prominence in recent years as businesses are expected to go beyond profit-making and contribute to the well-being of society. bangladesh, like many other countries, is emphasizing the importance of csr in corporate operations. 1corresponding author: orcid id: 0009-0000-4771-4738 © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/asfbr.v7i1.2109 to cite this article: ali, m. i. (2023). contribution of csr activities to disaster management in bangladesh: a study on banking sectors. asian finance & banking review, 7(1), 17-22. https://doi.org/10.46281/asfbr.v7i1.2109 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/asfbr.v7i1.2109 https://orcid.org/0009-0000-4771-4738 ali, asian finance & banking review 7(1) (2023), 17-22 18 understanding how banks in bangladesh engage in csr activities related to disaster management can shed light on the growing significance of csr in the country. swaen et al. (2008), reveals that the definition of csr is varied and numerous. csr stands for corporate social responsibility. it is a concept that refers to a company's commitment to conducting its business in an ethical and socially responsible manner (collier & esteban, 2007). csr involves a company taking responsibility for the impact of its activities on various stakeholders, including employees, customers, communities, and the environment. the increasing global emphasis on corporate social responsibility (csr) as a means to achieve sustainable development goals, as recognized by the united nations, underscores the pivotal role that csr plays in addressing societal and environmental challenges (csr report-2021, bangladesh bank). csr, a facet of business ethics, encapsulates a corporation's commitment to societal well-being within the framework of its operations (cornelius et al., 2008). the corporate social responsibility contributed as a commitment of organization's to enhance community by way of contribution of the organization's resources and discretionary business practices (kotler, et. al., 2005). according to csr perspective, organizations may be subsidiary in the formation in the world (friedman and miles, 2002). the study can assist in resource allocation for disaster preparedness, relief, and recovery efforts. by identifying the most affected regions and types of disasters, authorities can allocate resources more effectively, ensuring that areas at higher risk receive the necessary attention understanding which regions and types of disasters are most severely affected financially can aid in the allocation of resources and the development of targeted disaster management strategies. the following sections encompass the review of literature, the materials and methods described, the presentation of results, an in-depth discussion, and the summarizing conclusions. literature review sattar (2017) revealed that, most of the banks, there is no taken initiatives in disaster management risk except donating some medicine to the different kinds of disease and some money as relief activities. in the name of relief activities, they just take some initiatives, for the natural disaster affected peoples under corporate social responsibility. investigated that, in bangladesh, most of the companies are demonstrating commitment for health, local capacity building, infrastructure development, disaster relief, job creation, and many other socially responsibility activities. in view of this, the engagement of banking sectors in terms of financial inclusion, direct monetary expenditure, environmental banking, community investment and csr activities specially disaster management have sufficient increased (halder & rahman, 2014). ahmed (2017), the study also investigates that environment is the lowest emphasized of csr in the selected banks. it reveals that islami bank bangladesh limited should follow bangladesh bank guidelines to its annual report also reported their expenditure of csr and should increase expenditures amount of csr. bangladesh bank needs to sufficient monitoring over the csr activities islami banks bangladesh limited. rahman at. el., (2013), the activities of the general csr performed by nbl mainly include financing in educational sector, disaster relief distribution, sponsoring in arts & cultural and sports activities etc. comparing to several sectors it is found that national bank limited has principal contribution in health sector that almost covers 33% and of its total contribution and it contributed in natural disaster 22%. lindgreen et al. (2021) reveal that almost every bank is involved in the csr activities. among private commercial banks and all the scheduled banks contribute relatively more finance than other banks. it is also observed that, bangladesh banking sector is mainly engaged in csr activities through contributions education, health, disaster management, infrastructure development, environment and cultural welfare in remote areas. rashid (2014), indicated that, the expenditure of islami bank bangladesh limited in csr is more than other banks and health sector is significant. during several natural disaster, islami bank bangladesh limited come forward for giving relief into pm's relief fund for the disaster victims. finally reveals that, corporate social responsibility is played an important role for disaster affected people after natural disasters to access relief and create rehabilitation for the community people (sultana et al., 2020). osa (2013), this study indicate that, in the worldwide, many disasters affect more than 55% of the total population and all lives and assets damage is almost 42%. besides this, there is no specific study that explores the relationship between csr activities and disaster management and the amount of damage and loss by natural disaster in bangladesh perspective. in this study, of author is an effort to fill up this gap. materials and methods data sources the primary source of data for this study was the half-yearly corporate social responsibility (csr) reports of banks and financial institutions (fis). these reports provide detailed information about the csr activities and expenditures of the various institutions, offering insight into their corporate sustainability initiatives. additional data were sourced from the sustainable finance department of the bangladesh bank. this information is crucial for understanding the regulatory framework and guidelines governing csr activities in the banking sector. to analyze the relationship between csr expenditure and natural disaster factors, data related to natural disasters were obtained from the bangladesh disaster-related statistics (bdrs) for the year 2021. this data includes information about the occurrence and impact of natural disasters in bangladesh. data processing the collected data from the aforementioned sources were processed and organized using microsoft excel. this involved data cleaning, structuring, and creating datasets for subsequent analysis. excel was utilized for its versatility in handling ali, asian finance & banking review 7(1) (2023), 17-22 19 tabular data. to perform in-depth statistical analysis, spss software was employed. spss is widely recognized for its capabilities in statistical testing, regression analysis, and data visualization. the software was instrumental in deriving meaningful insights from the dataset. data analysis the csr expenditure data was subjected to percentage and trend analysis to understand how csr spending has evolved over time and to identify patterns and trends in expenditure. the study explored the relationship between csr expenditure and natural disaster factors. this analysis likely involved correlation or regression analysis to determine whether there is a statistically significant association between csr spending and the occurrence or impact of natural disasters. the research compared and analyzed the contribution of csr activities among different categories of banks, specifically:  state-owned commercial banks (socbs): these are banks owned by the government. the study likely examined the extent and nature of csr activities in socbs.  private commercial banks (pcbs): this category was further divided into conventional pcbs and islami shariah-based pcbs to evaluate and contrast csr initiatives in these segments.  foreign commercial banks (fcbs): the study also examined the csr activities of foreign commercial banks operating in bangladesh, comparing them with domestic banks. results the figure 1 shows the disaster management contribution (in crore tk.) of corporate social responsibility (csr) for different kinds of bank such as state-owned commercial banks (socbs), islami shariah based pcbs (isb pcbs), conventional pcbs (cpcbs) and foreign commercial banks (fcbs) in 2015-2021. the islami shariah based pcbs (isb pbcs) contributed disaster management above tk. 6 crore which is around 6 times of state-owned commercial banks (socbs) categorical banks, double of conventional pcbs (cpcbs) categorical banks and approximately 53 times of foreign commercial banks (fcbs) categorical banks in 2015. the contribution of islami shariah based pcbs and conventional pcbs in disaster management are increased from 2015 to 2018 and suddenly decreased in 2019 and then upward and downward from 2019 to 2021. on the other hand, the contribution of state-owned commercial banks and foreign commercial banks in disaster management are decreased from 2015 to 2018 and suddenly increased in 2019 next up and down from 2019 to 2021. finally the csr activities of islami shariah based pcbs is always greater than all other banks. figure 1. contribution of disaster management per bank. source: author calculation from figure 2, it indicates that the health contribution (in crore tk.) of corporate social responsibility (csr) for different kinds of bank such as state-owned commercial banks (socbs), islami shariah based pcbs (isb pcbs), conventional pcbs (cpcbs) and foreign commercial banks (fcbs) in 2015-2021. the islami shariah based pcbs contributed health approximately tk. 5 crore which is nearly 10 times of state-owned commercial banks (socbs) categorical banks, 3 times of conventional pcbs (cpcbs) categorical banks and above 5 times of foreign commercial banks (fcbs) categorical banks in 2015. the contribution of csr activities in health for state-owned commercial banks, islami shariah based pcbs, conventional pcbs and foreign commercial banks are decreased from 2015 to 2018 and suddenly decreased in 2019. subsequently the health contribution of islami shariah based pcbs and conventional pcbs are increased in 2019 to 2021. on the contrary, the health contribution of state-owned commercial banks and foreign commercial banks are up ward and down ward in 2019 to 2021. 0 5 10 15 20 2015 2016 2017 2018 2019 2020 2021c o n tr ib u ti o n c ro re in t k. year state-owned commercial banks (socbs) islami shariah based pcbs conventional pcbs foreign commercial banks (fcbs) ali, asian finance & banking review 7(1) (2023), 17-22 20 figure 2. health contribution per bank source: author calculation the table 1 indicated that the percentage of the total contribution in the corporate social responsibility is taken from 60 banks in bangladesh between 2015 t0 2021. now this table reveals the largest amount of percentage of corporate social responsibility came from conventional pcbs is 56.67% which is gives as nearly 2 times from islami shariah based pcbs (isb pcbs) is 33.08%, next 14 times from state-owned commercial banks (socbs) is 4.22% and then approximately 10 times from foreign commercial banks (fcbs) is 5.99% in 2015. next it is indicated the contributions of all banks are up ward and down ward from 2015 to 2021. table 1. percentage table of several banks in the corporate social responsibility year islami shariah based pcbs (isb pcbs) state-owned commercial banks (socbs) conventional pcbs (cpcbs) foreign commercial banks (fcbs) 2015 33.08 4.22 56.67 5.99 2016 37.73 6.55 50.92 4.78 2017 35.81 0.31 62.13 1.73 2018 49.05 0.55 48.83 1.54 2019 42.97 1.22 53.45 2.33 2020 37.40 0.65 59.03 2.91 2021 43.07 0.90 55.33 0.68 source: author calculation the table 2 shows that in the year 2015, the total amount of csr activities in education ranked first (tk. 158.36 crore), followed by disaster management (tk. 144.14 crore) and then health (tk. 111.14 crore) and the least contribution of csr activities is tk. 4.03 crore. the total amount of csr activities in education and disaster management are increased from 2015 to 2018, the rest of all sectors are up ward and down ward from 2015 to 2019. during covid-19, the contribution of csr activities in health and infrastructure development are rapidly increased in 2020-2021 but all other sectors are up ward and down ward in 2019-2021. finally it is clear that the contribution of csr activities in health is the height, followed by disaster management and then health. at last it is found that the least contribution of csr activities in income generating activities. table 2. total contribution table of sector wises in the corporate social responsibility y e a r s e d u c a ti o n h ea lt h d is a st er m a n a g em e n t e n v ir o n m e n t a n d c li m a te s p o r ts a n d c u lt u r e in fr a st r u c tu r e d e v el o p m e n t in c o m e g en er a ti n g a c ti v it ie s o th e r 2015 158.36 111.14 144.62 15.04 41.40 4.03 7.92 44.85 2016 148.86 38.18 188.31 11.41 20.65 1.51 26.15 61.68 2017 202.83 58.7 329.33 8.43 35.89 1.36 0.36 107.09 2018 380.03 51.68 330.84 2.79 45.00 1.55 0.95 91.79 2019 176.63 73.33 242.79 33.07 28.00 1.37 0.12 92.56 2020 104.32 174.8 406.13 23.91 89.30 8.88 0.05 160.16 2021 54.5 312.1 266.6 27.61 26.65 23.54 0.53 47.68 total 1225.53 819.93 1908.62 122.26 286.89 42.24 36.08 605.81 source: author calculation the figure 3 shows that sector wise damages and losses and disaster management contribution for various methods of cultivation in bangladesh. in both years, according to natural disaster the land degradation including reduced valuation approximately half times as much as crops which are the next largest amount accounted for 36.2% in 2015 and for 28.9% in 2021 and compared with disaster management rate of corporate social responsibility for 27.42% in 2015 and for 35.12% in 2021. on the contrary the amount of disaster management rate of corporate social responsibility for 27.42% in 2015 and 0.000 5.000 10.000 15.000 20.000 2015 2016 2017 2018 2019 2020 2021 c o n tr ib u ti o n c ro re in t k. year state-owned commercial banks (socbs) islami shariah based pcbs conventional pcbs foreign commercial banks (fcbs) ali, asian finance & banking review 7(1) (2023), 17-22 21 for 35.12% in 2021which is greater than the rate of livestock, poultry, fishery, dwelling & others infrastructure and homestead forestry for 4.76%, 1.21%, 5.82%, 17.19% and 8.1% in 2015 and for 3.98%, 1.51%, 3.71%, 7.38% and 1.96% in 2021 respectively. figure 3. sector wise damage and loss (in million tk. %) by disaster and disaster contribution of csr source: author calculation discussions islamic shariah based pcbs emerge as prominent contributors to disaster management and health, consistently surpassing other bank categories. their commitment to csr activities remains strong, contrast to state-owned commercial banks (socbs) and foreign commercial banks (fcbs), which exhibit varying levels of engagement. the fluctuations observed in csr contributions between 2015 and 2021 suggest a dynamic landscape where priorities and strategies may shift within these institutions. moreover, the sharp increase in csr contributions for health during the covid-19 pandemic (20202021) reflects the banking sector's adaptability in addressing unprecedented global crises. the distribution of csr contributions among different bank categories, with conventional pcbs leading in terms of the highest percentage of the total csr contributions. this underscores the consistent leadership of conventional pcbs in csr activities in bangladesh, emphasizing their unwavering commitment to societal and environmental welfare. the sector-wise distribution of csr contributions, with education and disaster management taking precedence in 2015, followed by health and other activities. notably, the surge in health and infrastructure development contributions during the covid19 pandemic underscores csr's flexibility in addressing emerging needs. conclusions in this study, these findings have important implications for policy development and strategic planning within the bangladeshi banking sector. they underscore the significance of maintaining consistent and adaptable csr efforts, especially during health crises like the covid-19 pandemic. the exceptional performance of islamic shariah based pcbs in csr initiatives in disaster management and the pronounced contributions highlight the need for a deeper exploration of the practices that set these banks apart. moreover, the study underscores the importance of achieving a more balanced distribution of csr contributions among various sectors, with particular attention to areas that may have been underrepresented, such as income-generating activities. the study's findings are limited by the availability and quality of data, potentially affecting the precision of the results and their generalizability to other contexts. while the study highlights trends in csr activities, it does not establish causality or provide in-depth qualitative insights into the motivations and outcomes of these activities, leaving room for more extensive and comprehensive research in the future. in essence, future research should focus on the practical implications and effectiveness of csr initiatives, the strategies employed by successful banks, and the role of regulatory bodies in fostering responsible banking practices. this can contribute to the continual improvement of csr activities and their positive impact on society in bangladesh and beyond. author contributions: conceptualization, m.i.a.; methodology, m.i.a.; software, m.i.a.; validation, m.i.a.; formal analysis, m.i.a.; investigation, m.i.a.; resources, m.i.a.; data curation, m.i.a.; writing – original draft preparation, m.i.a.; writing – review & editing, m.i.a.; visualization, m.i.a.; supervision, m.i.a.; project administration, m.i.a.; funding acquisition, m.i.a.” authors have read and agreed to the published version of the manuscript. institutional review board statement: ethical review and approval were waived for this study, due to that the research does not deal with vulnerable groups or sensitive issues. funding: the authors received no direct funding for this research. acknowledgement: not applicable. informed consent statement: informed consent was obtained from all subjects involved in the study. data availability statement: the data presented in this study are available on request from the corresponding author. the data are not publicly available due to restrictions. conflicts of interest: the authors declare no conflict of interest. references ahmed, k. (2017). corporate social responsibility expenditures reporting of selected islami banks in bangladesh. jagannath university journal of business studies, 5(1), 135-148. 36.2 4.76 1.21 5.82 26.72 17.19 8.1 27.4228.9 3.98 1.51 3.71 52.56 7.38 1.96 35.12 2015 2021 ali, asian finance & banking review 7(1) (2023), 17-22 22 collier, j., & esteban, r. (2007). corporate social responsibility and employee commitment. business ethics: a european review, 16(1), 19-33. https://doi.org/10.1111/j.1467-8608.2006.00466.x cornelius, n., todres, m., janjuha-jivraj, s., woods, a., & wallace, j. (2008). corporate social responsibility and the social enterprise. journal of business ethics, 81, 355-370. https://doi.org/10.1007/s10551-007-9500-7 friedman, a. l., & miles, s. (2002). developing stakeholder theory. journal of management studies, 39(1), 1-21. https://doi.org/10.1111/1467-6486.00280 garriga, e., & melé, d. (2004). corporate social responsibility theories: mapping the territory. journal of business ethics, 53, 51-71. https://doi.org/10.1023/b:busi.0000039399.90587.34 halder & rahman, (2014). an insight into corporate social responsibility practices of commercial banks in bangladesh. bangladesh research publication journal, 10(1), 25-32. kotler, p., & lee, n. (2008). corporate social responsibility: doing the most good for your company and your cause. john wiley & sons. lindgreen, a., swaen, v., & johnston, w. j. (2009). corporate social responsibility: an empirical investigation of us organizations. journal of business ethics, 85, 303-323. https://doi.org/10.1007/s10551-008-9738-8 mamun ur rashid, mohammad & mohammad ashrafur rashid (2014). corporate social responsibility practices of islamic commercial banks in bangladesh: a study on islami bank bangladesh limited (ibbl), jagannath university journal of business studies, 4(1 & 2), 47-61. maon, f., lindgreen, a., & swaen, v. (2009). designing and implementing corporate social responsibility: an integrative framework grounded in theory and practice. journal of business ethics, 87, 71-89. https://doi.org/10.1007/s10551008-9804-2 osa, y. (2013). the growing role of ngos in disaster relief and humanitarian assistance in east asia. a growing force: civil society’s role in asian regional security, 66-89. rahman, m., ahsan, a., hoq, m. r., & shah, m. u. a. (2013). csr practices in private sector banking in bangladesh: a case study on national bank limited. asian accounting and auditing advancement, 3(6), 8-14. sattar, m. a. (2017). corporate social responsibility in disaster risk management: a study on some selected private commercial banks of bangladesh. international journal of environment, ecology, family and urban studies (ijeefus), 7(5), 7-18. sultana, p., thompson, p. m., & wesselink, a. (2020). coping and resilience in riverine bangladesh. environmental hazards, 19(1), 70-89. publisher’s note: cribfb stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2023 by the authors. licensee cribfb, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). asian finance & banking review (p-issn 2576-1161 e-issn 2576-1188) by cribfb is licensed under a creative commons attribution 4.0 international license. http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ asian finance & banking review vol. 5, no. 1; 2021 issn 2576-1161 e-issn 2576-1188 published by cribfb, usa 54 the nexus between firm specific factors, macroeconomic factors and firm performance of textile sector of bangladesh imran mahmud independent researcher faculty of business studies university of dhaka, dhaka, bangladesh e-mail: imran.mahmud.du@gmail.com hossain ahmmed fahad independent researcher faculty of business studies university of dhaka, dhaka, bangladesh e-mail: fahadhossain.frg@gmail.com atkia nabiha rahman independent researcher faculty of business studies university of dhaka, dhaka, bangladesh e-mail: a.nabiharahman@gmail.com abstract the purpose of this study is to identify the determinant factors of the profitability of textile sector of bangladesh. to achieve this, a sample of 31 textile companies for the period of 2011 to 2019 is used. two dependent variablesreturn on assets roa (accounting measure) and tobin’s q (market measure) are tested using both fixed effect model and panel corrected standard error (pcse) model. as the pcse regression robustly suited the dataset, this is used to explain the impact of both firm specific factors and macro-economic factors on the performance of textile firms listed in dhaka stock exchange. the determinants of profitability differ depending on which measures of profitability we have taken as proxy. when roa is taken, age, debt to equity, debt to asset, growth, asset turnover, cost effectiveness (eatc) and export growth are found significant. among them, debt to equity, asset turnover, cost effectiveness and export growth conforms to the expected positive sign. in terms of tobin’s q, age, size, debt to equity, growth, cost effectiveness (eatc), board size and export growth are found having significant impact on firm performance where age, eatc, board size, and export growth conforms to the expected positive sign. keywords: tobin's q, cross sectional dependence, panel data analysis, pcse model, textile sector. jel classification codes: c83, c87, l25. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 55 introduction the economic growth and profitability of an industry contributes to the ultimate social welfare (hermelo & vassolo, 2007). firm performance plays an important role in national economic growth and creation of employment in the country. bangladesh is a south asian country with a population of approximately 165 million. textile as a whole is a heterogeneous product market with yarn, fabric, colors, brands, fashion, and material quality etc. all contributing to create economic value. readymade garments (rmg) sector of our country has become one of the biggest earners of foreign currency. billions of dollars as export earnings are received and millions of jobs are created by this sector each year. this sector comprises for 83% of total export earnings with a value of $33674 million during financial year 2019-2020. growth in the textile sector can be prolonged through the active role of both private and public stakeholders. the variables that influence the textile sector and its performance should be identified so that policymakers can formulate policies to influence those factors to have significant positive impact on textile firm’s performance. one of the intriguing discussions in business economics is regarding the determinant factors that impact firms’ performance, comparing firm-specific as well as industry specific factors (hintošová et al., 2020). there have been undeniable dominant opinions that choose firm specific factors over industrial factors to explain firm’s performance (blažková & dvouletý, 2018). in the light of resource-based theory, this study will focus in firm specific factors and macro-economic factors that influence the performance of textile sector. there are large empirical studies in this field around the world, however, few comparable works are conducted in bangladesh. kalam and utsho (2020) had conducted a similar study to identify the impact of firm specific factors on the profitability of nbfi in bangladesh using a panel data model. islam and khan (2019) investigated the factors affecting the firm’s performance of pharmaceutical industry of bangladesh using a random effect analysis. but with regard to textile industry, there exist only few studies conducted. hence, the goal of this paper is to assess the influence of firm-specific and macro-economic factors on the performance of firms operating in the textile industry and thus to enrich the standing literature in this field. a firm-level panel dataset allows us to test the effect of selected factors on firms´ performance using panel data regression approach of fixed effect model and panel corrected standard error linear regression model. the rest of the paper is designed as followssection 2 is the literature review and hypothesis, section 3 contains the methodology, section 4 contains estimation and results, section 5 discussion of the result, section 6 represents comparison of result with previous studies and section 7 provides the conclusions. literature review two competing approaches seeking to explain firm performance have been segmented into the industrial theory approach (competitive forces approach) and resource-based approach. significant works on the debate of industry effects versus firm-specific effects as key performance indicator have led other researchers to provide a more in-depth view on the issue (rumelt, 1991; porter, 1980; schumacher & boland, 2005; blažková & dvouletý, 2018; hanggraeni et al., 2019). mcgahan and porter (2002), using a broad dataset covering every sector within the usa, showed that firm-specific factors influence business long run and short run profitability significantly in contrast to industrial factors. the study also showed that the effects of firm-specific individual factors have differed across different sectors. another study was done by pervan et al. (2018) illustrated that both firm-specific factors and industrial and macro-economic factors significantly https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 56 affect business performance but the impact of the former was shown to be greater. the resourcebased view theory can be used to explain the importance of individual internal firm-specific factors in a firm’s profitability (barney, 1991). the theory is based on the premise that scarce resources that competitors cannot easily copy or imitate or substitute lead to superior performance. many studies have been conducted to identify firm-specific and macro-economic determinants in different countries in different sectors. variables such as size, tangibility, growth, leverage level, liquidity ratio, and efficiency ratios are examined in studies to deal with internal determinants of firm performance with often inconclusive results. a pioneering study done by chowdhury and amin (2007) illustrated that working capital has a significant impact on the financial performance of pharmaceutical firms in bangladesh. kuntluru et al. (2008) conducted a study on the determinants of financial performance of indian companies and found a negative relationship between debt ratio and profitability along with a positive relationship among firm size and growth and profitability. stierwald (2010) took 961 large australian firms and exhibited that lagged profit and firm size have the most contribution to performance and profitability. pathirawasam (2011) found out that internal factors i.e., firm size, inventory ratio, debt ratio, and the quick ratio have a significant impact on the financial performance when measured by return on assets (roa). the study of pratheepan (2014) found out that size has a positive impact whereas leverage and liquidity have an insignificant impact on the profitability of manufacturing firms in sri lanka. bhutta and hasan (2013) studied the firm-specific and macroeconomic factors on firm performance of food sector in pakistan using multivariate regression analysis from 2002 through 2006. findings revealed a significant negative impact of size and profitability on firm performance. moreover, tangibility, growth, and food inflation are observed to have an insignificant positive impact and debt to equity an insignificant negative impact. chhapra et al. (2012) studied the determinants of capital structure that affect the growth of firms of textile sector in pakistan using data from 90 companies from 2005 to 2010. they used a linear regression model to examine how size, taxes, profitability, fixed assets have an impact on financial leverage. they found that fixed assets, sizes, taxes, and net profit do not have any significant impact on leverage, however, the size of the firm has a negative significant impact on leverage. abbas et al. (2013) used leverage, growth, size, etc. as firm-specific factors to determine their impact on the profitability of the textile sector of pakistan. they used panel data of different firms for the period 2005 to 2010 using a linear regression model. findings of the study exhibited that leverage has negative while the size of the firm has a positive impact on the firm’s profitability. however, they failed to find any significant relationship of growth and liquidity on a firm’s performance. antoun et al. (2018) studied the relationship of financial performance with internal and external factors on a sample selected from banks in central and eastern europe. they found that size, bank concentration, economic growth, business mix, inflation rate can significantly explain financial performance when measured with a performance index. jelena et al. (2018) in their study on the determinants of profitability of medium and large agricultural companies in serbia concluded that market share, sales revenue growth, insurance, export, and current ratio have a positive impact on firm performance. blažková and dvouletý (2018) conducted a study to investigate the impact of firm-specific factors on the financial performance of the czech food processing firm over 2003-2014 with 1804 firms. the proxy for financial performance was taken as price-cost margin, return on assets and https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 57 return on equity. they found a positive relationship between labor productivity and profitability, a negative relationship between leverage and profitability, and a positive relationship between age and firm size. an exploratory study on the impact of firm-specific factors on profitability of life insurance companies in eight asian countries covering a period of 2008-2014 using a panel data random model revealed that size, the volume of capital, and underwriting risk has a significant relationship with profitability. besides, they found that premium growth, asset tangibility, and liquidity are insignificant indicators of profitability (zainudin et al., 2018). vieira et al. (2019) performed a similar type of study on determinants of the portuguese firms’ performance. the study covered 37 non-financial firms from 2010 to 2015. they tested three dependent variables using the generalized method of moments. they found that in terms of the market variable of performance, firm-specific variables are not so important to explain. they also explained that investor sentiment and insider ownership more effectively explain firm performance. they ultimately infer that determinant of firm performance change in compliance with the way stakeholders define firm performance. dakić et al. (2019) implemented a study on the determinants of business success of serbian food processing companies. the findings showed that debt ratio, quick ratio, sales growth, firm size, and capital turnover ratio can affect firm performance when measured by return on assets (roa). hintošová et al. (2020) used age, liquidity ratio, size, asset turnover, and cost-effectiveness as determinants of firm profitability on data from 2009 to 2017 for 48 firms in the metallurgical industry in slovakia and found a significant ambiguous impact of liquidity and age, negative impact of asset turnover and positive effect of cost-effectiveness on firm’s profitability. ullah et al. (2020) conducted a similar study to determine the nexus between firm-specific, macroeconomic factors on the performance of the textile sector in pakistan. the study was done on 90 textile firms for the period 2008 to 2017 forming unbalanced panel data. they found a negative significant impact of debt to equity, negative insignificant impact of asset turnover ratio, the positive impact of export growth and sales growth, and negative impact of firm size, tax payable, and debt to asset with insignificant impact on firm performance. kalam and utsho (2020) in their study on firm-specific profitability indicators of the nbfis in bangladesh conducted a panel data analysis on 19 nbfis from 2007 to 2017. the study used total interest income to total asset, non-operating income to total asset, operating expense to total asset, deposit to total asset, size, and equity multiplier as explanatory variables and found mixed results about the significance and direction of the relationship. liu et al. (2020) undertook a study to identify the determinants of financial performance of agricultural companies in china with a data set of 39 listed companies for the period 2013-2018. the study tested internal firm-specific factors and external macro-economic factors where they have measured financial performance based on return on assets (roa), return on sales (ros), and return on equity (roe). the results show that firm size, long term liability ratio, sales growth rate is positively related and debt ratio, capital intensity, and export intensity are negatively related to firm performance. moreover, they found no significant impact of external factors on financial performance. islam and khan (2019) published their work on determining the factors of profitability of pharmaceutical industry of bangladesh using a random effect analysis. they used a sample size of 20 listed companies for a period 2007 to 2016. they found that sales, operating income, operating cost, return on equity, and total debt have a significant impact on profitability of https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 58 pharmaceutical industry. they also found that in terms of macro-specific variables, gdp rate of inflation have a significant impact on firm performance. research question  is there any relationship between firm-specific factors and firm performance of the textile sector of bangladesh?  is there any relationship between macro-economic factors and firm performance of the textile sector of bangladesh? method sample selection we determined the appropriate sample size for a small population using the cochran’s formula (glen, 2021). 1st step: determine the sample size for a larger population. 𝒏𝟎 = 𝒁𝟐𝒑𝒒 𝒆𝟐 where, n0 = size of sample for a large population; z = the value at a certain confidence interval found in the z table; p= estimated proportion of the population, that is, the sample; q= 1-p. if z= 1.64 at 10% significance level, p=0.5 so q=0.5, the sample size would be, n0= 𝟏.𝟔𝟒𝟐∗𝟎.𝟓∗𝟎.𝟓 𝟎.𝟏𝟐 =67.24 step 2: determine the required sample size for a small population 𝒏 = 𝒏𝟎 𝟏 + (𝒏𝟎−𝟏) 𝑵 where, n0 is cochran’s appropriate sample size, n is the population and n are the adjusted sample size for the population in this study. as, n0 =67, n=54, so the appropriate sample size is, n = 𝟔𝟕 𝟏+ (𝟔𝟕−𝟏) 𝟓𝟒 =30.15 variables selection dependent variables as there is no clear literature or view on which variables should be taken as the proxy of firm performance, we have considered two dependent variables. one accounting measure: in this study, we have defined financial performance, the dependent variable, by using return on total assets (rota). rota is also known as basic earning power ratio (bep) ratio. this variable has been adopted in former research as well (ahmad et al., 2015; hintošová et al., 2020; hult et al., 2008; mijić et al., 2014; bayaraa, 2017; kumari &kumar, 2018; fiala et al., 2020). one market performance measure: tobin’s q has been taken as a proxy for firm performance in its competitive market. tobin’s q is the modified version of q suggested by chung and pruitt (1994). according to the methodology of singh et al. (2017), tobin’s q is calculated by dividing the summation of the firm’s market value of equity and total debt by the book value of total assets. independent variables the determinants of financial performance have been tested using firm-specific and macroeconomic specific predictors. firm size, age, debt to equity (de), debt to asset (da), current ratio, https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 59 board size, growth, asset turnover ratio, earning after tax as % of total cost (eatc) are the representative of firm specific factors whereas taxation, gdp and export growth is selected as macro-economic factors. the first variable is size of the firm. most studies have proved that larger firms have higher profit generating ability thus showed a positive impact on financial performance (asimakopoulus et al., 2009; nunes et al., 2009; pratheepan, 2014; nakatani, 2019, abbas et al., 2013; majumdar & chhibber, 1999; hermelo & vassolo, 2007). goddard et al. (2005) however found a negative size-profitability relationship. age of the firm as a determinant factor is supposed to have bi-directional impact on firm performance (coad et al., 2013; blažková & dvouletý, 2019). they found that aging firm boosts productivity level and higher profits but slow down business performance. cowling et al. (2018) on the other hand gathered proof of negative firm age-profitability relationship. current ratio is taken as a proxy for liquidity from the work of (nanda & panda, 2018; jelena et al., 2018). liquidity is found to be positively related to profitability (goddard et al., 2005; nanda & panda, 2018; yameen et al., 2019) as well as none or negatively related to profitability (zainudin et al., 2018). asset turnover ratio, calculated by total sales to total assets, if higher indicates firm is efficiently using its assets to generate revenue. ahmad et al. (2015) found a positive relationship between asset turnover ratio and profitability. growth is measured as annual growth in assets following the work of abbas et al. (2013) and glancey (1998). where jelena et al. (2018) and singh et al. (2019) found positive impact of growth, however, ahmad et al. (2015) found a negative impact of growth on firm performance. within the resource-based view theory, it is said that manufacturing capabilities are generated internally which is inimitable non-transferable (chavez et al., 2017). to incorporate this view, cost effectiveness has been taken as a determinant variable. earning after tax as a % of total cost (eatc) has been taken as a proxy for cost effectiveness. hintošová et al. (2020) found a positive relationship between eatc and profitability. board of directors are responsible to protect shareholders’ interest by restricting conflicts of interest between managers and shareholders. guest (2009) and marcelo et al. (2014) conducting a study on uk firms and portuguese firms respectively found out that board size has a significant negative impact on profitability suggesting a weak monitoring and malfunction of boards’ advisory role. on the other hand, daily et al. (2003) and drobetz et al. (2004) concluded a positive board size-profitability relationship. another important factor is leverage. to calculate leverage, debt to assets and debt to equity will be used following the methodology of ullah et al. (2020). most empiral studies have found an inverse leverage-profitability relationship (asimakopoulus et al., 2009; nunes et al., 2009; khaled & samman, 2015; nanda & panda, 2018; blažková & dvouletý, 2019). taxation is calculated as income tax expense over earnings before taxes (ebt) following the methodology of ullah et al. (2020). according to trade-off theory, the effective tax rate and profitability has a significant positive relationship as higher tax rate reduces the debt costs. chhapra et al. (2012) found an insignificant relationship between tax and financial leverage whereas ullah et al. (2020) found a significant negative relationship between profitability and tax rate. export is found to be positively related to firm performance of agricultural companies from the study of jelena et al. (2018). ullah et al. (2020) also found a significant positive exporthttps://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 60 profitability relationship on the textile firms of pakistan. natural logarithm of export growth has been taken as proxy of for this variable. the last macro-economic variable selected for the study is real gdp. bangladesh is speeding up with competition in regards of gdp. gan et al. (2006) and kosmidou (2008) found a positive relationship between gdp and performance. table 1. definition of variables used in study variables notations description expected sign dependent variables profitability roa ratio of net ebit to total assets tobin’s q ratio of (mve +debt) to total assets independent variables control age difference between year of establishment and the year in consideration + firm specific ln_size logarithm of total assets + de ratio of interest bearing debt to total equity -/+ da ratio of interest bearing debt to total assets -/+ tato ratio of total sales to total assets + growth annual growth in assets + liquidity ratio of current asset to current liabilities + eatc earnings after taxes as a ratio of total costs + board size natural logarithm of board size + macro-economic export growth variation in the natural logarithm of total exports (textile sector). + taxation ratio of income tax expenses over income earned before taxes (ebt) + real gdp nominal gdp less inflation rate + note: roa: return on total asset; ebit: earnings before interest tax; mve: market value equity; ln: natural logarithm; de: debt-equity; da: debt-asset; tato: total asset turnover; ebt: earnings before tax; gdp: gross domestic product. hypotheses based on the literature review, the major policy questions of this paper is to identify how various predictor determinants affects the firm’s performance of textile sector in bangladesh and whether these factors have positive or negative impact on performance. incidentally, the hypotheses to be tested are given as follows: firm specific factors  h0: firm size has no impact on firm’s profitability  h0: firm age has no impact on firm’s profitability  h0: debt to equity has no impact on firm’s profitability  h0: debt to asset has no impact on firm’s profitability  h0: asset turnover ratio has no impact on firm’s profitability  h0: growth has no impact on firm’s profitability  h0: liquidity has no impact on firm’s profitability  h0: earning after tax as a % of total cost has no impact on firm’s profitability  h0: board size has no impact on firm’s profitability macro-economic factors  h0: export has no impact on firm’s profitability https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 61  h0: taxation has no impact on firm’s profitability  h0: gdp has no impact on firm’s profitability model of the study using the determinants selected, the models that are germane to this study to analyze the hypothesized relationship between dependent and independent variable are roa=α + β1ageit + β2lnsizeit + β3deit + β4dait + β5crit + β6growthit + β7tatoit + β8eatcit + β9taxationit + β10ex_growthit + β11boardsizeit + β12gdpit + uit + εit tobin’s q=α + β1ageit + β2lnsizeit + β3deit + β4dait + β5crit + β6growthit + β7tatoit + β8eatcit + β9taxationit + β10ex_growthit + β11boardsizeit + β12gdpit + uit + εit where i = 1, 2, …. n and t = 1, 2, … t representing firm and year respectively; β is the parameter and ε represents the error term or disturbance and u represents the unobserved variations. empirical result descriptive statistics first the study shows the mean, standard deviation, minimum and maximum value for total 31 companies with 279 observation of the textile sector. then we test the dataset against the assumptions of normal distribution to show what regression model fits our dataset best. table 2. descriptive statistics of study variables obs mean std. deviation min max roa 279 0.071 0.059 -0.215 0.308 npm 279 0.034 0.243 -3.147 0.745 tobinsq 279 1.824 2.645 -1.353 25.007 age 279 20.871 10.781 4.000 57.000 ln_size 279 21.492 1.071 18.622 23.602 de 279 0.692 0.768 -1.672 4.796 da 279 0.332 0.287 0.000 2.517 cr 279 2.049 2.374 0.084 14.673 growth 279 0.213 0.459 -0.800 3.095 tato 279 0.761 0.639 0.065 4.104 eatc 279 0.059 0.117 -0.759 0.779 taxation 279 0.152 0.272 -3.553 0.881 ex_gr 279 0.113 0.116 0.002 0.4335 bdsize 279 6.867 1.702 2 12 real_gdp 279 0.069 0.007 0.060 0.082 source: author’s calculation https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 62 multicollinearity test table 3. result of pearson correlation coefficient of predictor variables age size de da cr growth tato eatc ta x ex_gr bdsize gdp age 1.00 size -0.42 1.00 de 0.09 -0.02 1.00 da 0.05 -0.33 0.18 1.00 cr -0.19 0.06 -0.21 -0.26 1.00 growth -0.09 0.20 -0.03 -0.14 0.02 1.00 tato 0.24 -0.43 0.06 0.06 -0.18 -0.14 1.00 eatc -0.28 0.20 -0.19 -0.31 0.21 0.19 -0.14 1.00 tax 0.03 -0.00 -0.07 -0.14 -0.01 0.04 0.22 0.05 1.0 0 ex_gr -0.13 -0.12 0.11 0.06 -0.05 0.05 0.05 0.09 0.0 2 1.00 bdsize 0.22 0.17 -0.10 0.06 -0.07 0.05 -0.02 -0.10 0.0 2 -0.10 1.00 gdp 0.21 0.15 0.02 0.10 -0.01 -0.01 -0.08 -0.22 0.0 5 -0.26 0.06 1.00 source: author’s calculation the results shown in the table shows that there are no multicollinearity problems among the independent determinant variables selected in this study. table 4. results of vif test variables vif 1/vif ln_size 2.22 0.45 age 1.77 0.56 da 1.52 0.66 tato 1.38 0.72 real_gdp 1.31 0.77 eatc 1.30 0.77 ln_bdsize 1.26 0.79 cr 1.22 0.82 de 1.18 0.85 ex_gr 1.14 0.88 taxation 1.10 0.91 growth 1.08 0.92 mean 1.37 source: author’s calculation the vif value for the selected variables that are tested in this paper is 1.37 on an average which indicates that the multicollinearity problems do not exist in this model. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 63 heteroscedasticity test table 5. results of heteroscedasticity test breusch pagan /cook-weisberg test for heteroscedasticity model chi2(1) prob>chi2 presence of heteroscedasticity model 1-roa 11.33 0.00*** yes model 2-tobin’s q 86.29 0.00*** yes note: * represents significance at 10% level, ** represents significance at 5% level and *** represents significance at 1% level. source: author’s calculation the table shows the summary of breusch-pagan test. autocorrelation test table 6. results of autocorrelation test wooldridge test for autocorrelation in panel data model chi2(1) prob>chi2 presence of autocorrelation model 1-roa 3.428 0.0740* yes model 2-tobins q 24.133 0.0000*** yes note: * represents significance at 10% level, ** represents significance at 5% level and *** represents significance at 1% level. source: author’s calculation table shows the result of autocorrelation test for the model of this study using wooldridge et al. (1995) test. test for cross sectional dependency to see whether our model suffer from cross-sectional dependency, the xtcsd command in stata has been used following the methodology of pesaran (2004) and friedman (1937). table 7. results of test for cross sectional dependency model pesaran’s value friedman ’s value avg. value of offdiagonal elements (abs) cross-sectional dependency model 1-rota -1.144 4.757 0.37 yes1 model 3-tobin’s q 2.542*** 16.80 0.38 yes2 sour note: 1 & 2 represents that pesaran’s value and friedman’s value are ambiguous in terms of direction in which case the average off-diagonal value should be used as parameter. as off-diagonal value is greater than 0.25, so model rota and tobin’s q have considered to have cross sectional dependency. source: author’s calculation table shows the result of pesaran’s test for cross-sectional dependency. the results clearly show that at a 10% significance level, two of these models suffer from cross-sectional dependency. hausman test to choose whether we should go with random effect or fixed effect model, the hausman (1978) test is needed to be run. the null hypothesis of the test states that random effect should be used. the null hypothesis can be rejected at the significance level of 5%. https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 64 table 8. results of hausman test model chi2(9) p value decision model 1-roa 51.49 0.0000*** fixed effect model model 2-tobins q 16.06 0.1884 random effect model note: * represents significance at 10% level, ** represents significance at 5% level and *** represents significance at 1% level. source: author’s calculation as it is found that there is heteroscedasticity problem associated with each of the model in this study and the two model is suffering from serial correlation problem among error terms, the results generated from fe or re model cannot be taken as utopia and unbiased. so, the model must be corrected for these problems in data set. hence, the model selected for our study is pcse model that is said to improve the robustness. panel corrected standard error (pcse) model pcse model shows improved result when the dataset is balanced which is in agreement with our study table 9. summary of prais-winston linear regression pcse analysis for model 1 & 2 variables model 1-rota model 2-tobin’s q coef. z p>│ z│ coef. z p>│ z│ firm-specific factors age -0.01 -6.39 0.00*** 0.02 1.73 0.08* ln_size -0.01 -0.88 0.38 -0.30 -3.19 0.00*** de 0.03 5.3 0.00*** -0.17 -2.02 0.04** da -0.06 -3.26 0.00*** 0.35 1.20 0.23 cr -0.01 -1.46 0.14 0.00 0.09 0.93 growth -0.01 -3.16 0.00*** -0.15 -2.38 0.02** tato 0.04 5.8 0.00*** 0.11 0.69 0.49 eatc 0.17 5.65 0.00*** 1.31 2.33 0.02** ln bd size 0.01 0.3 0.76 0.34 2.05 0.04** macro-economic factors taxation 0.01 0.3 0.77 -0.01 -0.19 0.85 ex_growth 0.27 2.03 0.04** 8.00 2.60 0.01*** gdp -0.11 -0.4 0.69 5.52 0.81 0.42 constant 0.15 2.05 0.04** 6.19 2.81 0.01*** r-sq 0.73 0.43 chi2 230.99 63.91 prob>chi2 0.0000 0.0000 note: * represents significance at 10% level, ** represents significance at 5% level and *** represents significance at 1% level. (underline) represents wrong sign. source: author’s calculation table shows the result of pcse regression analysis for each of the two model. for model 1-roa, the firm-specific factors i.e., size, debt to equity (de), asset turnover (tato), cost efficiency measured by eatc, and board size have a positive impact on roa and age of firm and https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 65 size of the firm, da, cr and growth have a negative impact on net profit margin. however, among the independent firm-specific variables age, de, da, growth, tato and eatc have proved to be statistically significant. in terms of macro-economic variables, taxation and export growth have a positive impact on profitability and gdp growth has a negative impact on profitability. among these variables, export growth is being found to be statistically significant as p value is less than 5%. the overall r2 is around 73%. in addition, the model is found to be valid as the f-value is positively large and p value is less than 5%. in other words, the goodness of fit of the model is pretty good in predicting the roa of the textile sectors. for model 2-tobin’s q, the pcse model has a r2 value of 43% implying that the goodness of the fit of this model is somewhat acceptable and the model is justifiable as well since it has a fvalue of 63.91 and overall p value of lower than 5%. according to the pcse model, age, debt to asset (da), cr, asset turnover (tato), cost efficiency (eatc) and board size, gdp growth and export growth have a positive impact on market replacement value of profitability whereas size of the firm, debt to equity (de), growth and taxation have a negative impact on profitability. among the firm-specific variables, age, size of the firm, de, growth, eatc, board size is found to be significant. among the macro-specific variables, only export growth is found to be statistically significant. comparison of study results with previous works according to wto, bangladesh holds the 3rd position among the top 10 exporters of clothing in 2019. china holds the 1st position in that list. india and pakistan also took their position in that list too. a comparison of our result with those of previous literature is shown below. table 10. comparison of the study with previous literatures comparison of results (accounting measures of profitability) variable expected sign textile sector of bangladesh previous literature (sign & significance) countries and sectors on the study has been conducted firm-specific factors age + (-)√ positive; significant negative; significant slovak, metallurgic (2020) bangladesh, textile (2020) size + (-)× negative; significant positive; significant pakistan, textile (2020) china, agricultural (2020) de -/+ (+)√ negative; significant positive; significant pakistan, textile (2020) india, textile (2019) da -/+ (-)√ negative; insignificant negative; insignificant pakistan, textile (2020) china, agricultural (2020) cr + (-)× positive; insignificant positive; significant positive; significant china, agricultural (2020) slovak, metallurgic (2020) india, textile (2019) growth + (-)√ positive; significant pakistan, textile (2020) tato + (+)√ negative; insignificant negative; insignificant pakistan, textile (2020) india, textile (2019) eatc + (+)√ positive; significant slovak, metallurgic (2020) board size + (+)× negative; insignificant portugal, manufacturing (2019) https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 66 macro-economic factors taxation + (+)× positive; insignificant pakistan, textile (2020) ex_growth + (+)√ positive; significant pakistan, textile (2020) gdp + (-)× positive; insignificant positive; insignificant china, agricultural (2020) portugal, manufacturing (2019) findings and discussions findings this section is divided into two parts. first the study presents the findings of individual model in terms of pcse regression analysis as this model corrects all the diagnostic issues with the dataset. later the overall findings of the paper are discussed in this section. from the analysis it is lucid that there are a number of firm-specific and macro-specific factors that influence firm performance. the findings of individual model are disclosed below. table 11. summary result of model 1roa variable expected sign pcse model actual sign significance firm-specific factors age + √ ln_size + × de -/+ + √ da -/+ √ cr + × growth + √ tato + + √ eatc + + √ board size + + × macro-economic factors taxation + + × ex_growth + + √ gdp + × in the first model, roa is taken as a proxy for accounting profitability in textile sector. our analysis found that in textile sector, as firm is aging, their performance is retrograding significantly. in our study, it is found that as size of the firm is increasing, firm performance is degrading but the result is not significant. the relationship between capital structure and profitability can be both positive and negative supported by two classes of theories: trade-off theory and pecking order theory. in our study, it is found that debt to equity is positively and significantly related to profitability. it can be supported by the fact that mean debt to equity ratio of textile sector is around 69% and the firms are getting the tax benefit due to this higher ratio. liquidity cr is found to be negatively related to profitability but the result is insignificant. as the mean cr ratio of textile firm is 2.05, it can be concluded that excessive capital is being unutilized https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 67 bringing down the profitability. another paradoxical relationship found is between growth of assets and profitability at a significant level. in terms of macro-economic factors, taxation and export growth are found to be positively related to roa. it agrees with the expected sign of the variables but only export growth is found to be significant in result. gdp growth rate is found to be negatively but insignificantly related to profitability. table 12. summary result of model 2tobin’s q variable expected sign pcse model actual sign significance firm-specific factors age + + √ ln_size + √ de -/+ √ da -/+ + × cr + + × growth + √ tato + + × eatc + + √ board size + + √ macro-economic factors taxation + × ex_growth + + √ gdp + + × model 2-tobin’s q represents profitability in terms of market performance and its replacement cost. it can be seen from the table that; age of the firm has a positive and significant impact on firm market performance of textile sector. size of the firm and profitability is found to have a significantly negative paradoxical relationship with firm market performance. it is the same as the result found when profitability was measured by roa. de is found to have a negative significant impact on firm’s market replacement value. debt to asset ratio shows a paradoxical relationship with firm performance but it was insignificant. liquidity cr is found to be insignificant and positively related to firm value. growth of asset is found to be negatively and significantly related to firm performance. tato, eatc and board size are found to be positively and significantly related to firm performance just like when regressed with roa as well. in terms of macro-economic factors, export growth and gdp are found to have a positive impact on firm market performance while taxation found to be negatively related to profitability. only export growth is found to be significant. it agrees with the expected sign as well as the sign found from model 1-roa. discussion of findings hence, the overall findings of this study are that both firm-specific and macro-economic variables have a significant impact on profitability of the textile sectors in terms of the different measures of profitability. however, their impact on profitability rest on which variable has been selected as https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 68 a proxy to measure profitability. specifically, asset turnover (tato), cost efficiency (eatc) and export growth (ln.ex_growth) are found to be the most significant and influential factor to determine the firm’s profitability. tato, eatc and export growth are inferred to be positively related no matter which measures of profitability is selected. age of the firm is another significant variable impacting firm’s performance. yet the direction of its relationship with profitability depends on from which point of view profitability is being measured. size of the asset base of the firms is found to be negatively related to profitability inferring that increased asset size is not being effectively utilized to generate profits as well. another significant variable, growth, has proved to be negatively related to profitability suggesting that within textile sector, business performance is retrograding with age implying the lower growth rates for these firms. it urges textile firms need to be more efficient in terms of technology and labor utilization. otherwise, profitability will see a downward trend despite its asset growth. board size has a positive impact on profitability when measured by accounting book value terms (roa) or market value measures (tobin’s q). though it does not show significant result in terms of roa, still it can be implied that the larger size of the board is skeptical in performing its monitoring role actively enhancing its profitability. taxation has a positive impact on profitability in terms of book value profitability. it implies that, though having an insignificant relationship, firms paying a moderate level of tax accomplish greater profitability conforming to the trade-off theory of the higher the tax rate, the lower the debt costs. lastly, debt to equity (de) is found to have a positive relationship with profitability in terms of roa as the dependent variables. it implies that the trade-off theory holds true in this case. lastly, other than export growth, no macro-economic factors seem to provide a significant and consistent relationship with profitability. conclusion and implications this study examines the firm-specific factors and macro-economic determinants of firm profitability of textile sector of bangladesh. the results using the pcse model suggest that the determinants of financial performance change depending on the variable taken as a proxy of firm profitability. since managers and investors constitute varying interest, the relative strengths of any explanatory variables on both of these proxies of firm performance must be known. for the first model, roa was used to measure firm performance. as growth and age of the firm has a negative paradoxical relationship with profitability, it advises that policymakers and management body of the firms of textile sectors must manage their firms more efficiently by introducing technological equipment so that the increased assets size and their experience in terms of increased leads to productivity instead of declining it. moreover, policymakers should continue to give rebate and incentives so that our rmg products are most welcome in other countries and the textile industry remains competitive. our second model incorporates tobin’s q as firm’s profitability. leverage and size of the firm have negative impact on profitability. it implies that investors prefer growth of firm be equipped with subsequent profitable investment instead of underutilization and lower level of financial leverage. so, managers must look into this issue to increase profitability. in terms of macro-economic factors, only export growth is found to have a significant positive impact on profitability urging the policymakers to support export growth. this research may contribute to a wide range of stakeholders such as managers, investors, regulators, banks etc. however, this study has some limitations. this study can include only 31 firms in its sample as market of our country is still small. moreover, there are some other variables https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 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(2018). firm-specific internal determinants of profitability performance: an exploratory study of selected life insurance firms in asia. international journal of asia business studies, 12(4), 533-550. appendices list of textile companies serial no name serial no name 1 alhaj textile mills limited 17 paramount textile limited https://www.cribfb.com/journal/index.php/asfbr asian finance & banking review vol. 5, no. 1; 2021 74 2 alltex industries limited 18 rahim textile mills limited 3 anlimayarn dyeing limited 19 regent textile mills limited 4 apex spinning and knitting mills limited 20 r.n. spinning mills limited 5 argon denims limited 21 safko spinning mills limited 6 dragon sweater and spinning limited 22 saiham cotton mills limited 7 dulamia cotton spinning mills limited 23 saiham textile mills limited 8 desh garments limited 24 shasha denims limited 9 envoy textiles limited 25 simtex industries limited 10 h. r. textile mills limited 26 sonargaon textiles limited 11 maksons spinning mills limited 27 square textiles limited 12 malek spinning mills limited 28 stylecraft limited 13 matin spinning mills limited 29 tosrifa industries limited 14 metro spinning limited 30 zaheen spinning limited 15 mozaffar hossain spinning mills limited 31 zahintex industries limited 16 prime textile spinning mills limited copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (https://creativecommons.org/licenses/by/4.0/). asian finance & banking review 9(1) (2025), 1-8 1 finance & banking review asfbr vol 9 no 1 (2025) p-issn 2576-1161 e-issn 2576-1188 journal homepage: https://www.cribfb.com/journal/index.php/asfbr published by asian finance & banking society, usa the accuracy analysis of financial distress model a benchmark of operational performance and firms' investment syamsu alang (a)1 (a) senior lecturer, school of economics, bhakti prasetya karya praja, jakarta, indonesia; e-mail: syamsualang@yahoo.com a r t i c l e i n f o article history: received: 4th march 2024 reviewed & revised: 5th march to 4th august 2025 accepted: 4th august 2025 published: 5th august 2025 keywords: financial distress, the zmijewski prediction model jel classification codes: c52, g01, g32, l90, n25 peer-review model: external peer-review was done through double-blind method. a b s t r a c t this study aims to find out the difference in the level of model accuracy among the modified altman prediction (z-score), springate (s-score), and zmijewski prediction models in predicting financial distress as a model of predicting operational management and investment performance benchmarks in transportation sub-sector firms in the indonesian stock exchange (idx) for the 4-period time. this study is a quantitative descriptive approach. the sampling technique is purposive sampling. this study utilizes sample data from the idx, specifically www.idx.co.id, as well as the official websites of each firm. the results demonstrate that the modification altman z-score model can predict financial distress or potential bankruptcy by correctly assigning as many as 26 out of 48 samples, achieving an accuracy rate of 54.17%. the springate s-score model can predict financial distress or potential bankruptcy by assigning as many as 24 samples from 48 samples with an accuracy rate of 50%. the zmijewski model was able to predict financial distress or potential bankruptcy with the highest accuracy level among the models used in this study, achieving an accuracy rate of 70.83% on 34 out of 48 samples. the conclusion from the three model bankruptcies is that the zmijewski model is the most suitable for firms to use if they want to attract potential investors. it is used to predict financial distress and operational performance, as well as to inform firms' investment decisions. the findings of this study suggest that additional financial distress prediction models, such as ohlson, grover, and others, can be utilized to compare and contrast the yields of financial distress analysis. © 2025 by the authors. licensee asian finance & banking society, usa. this article is an openaccess article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). introduction business potential increasingly attracts investment, especially in the development of the digital industry era 4.0, which is currently experiencing rapid growth (botti et al., 2021). this map illustrates intense business competition among firms worldwide, particularly in indonesia. all efforts are made to be the best. effective management strategies and processes are key to success in today's industry, encompassing human resource management, marketing management, production management, and financial management (apus, 2024). strategy and management of operations and operational sectors are crucial management functions for an organization or firm. operational management is developing very rapidly. this is due to the emergence of many innovations in technology that are applied in business practices; therefore, firms in the world are starting to look at and try to make aspects of operational management and operations a strategic tool to compete and outperform their competitors (füller, hutter, wahl, bilgram, & tekic, 2022). in line with the firm's efforts to sharpen the service quality, especially in responding to the needs of effective operational management of the firm in implementing programs and efficient in management and productive in achievement, various potentials will be mobilized using limited resources owned by optimizing working capital and investment in capital goods according to the business competency entered (icai, 2021), considering that the success of the firm's operations will be tested by the final achievement of each financial report closing period. transportation service firms are one type of business that is encouraged to continue investing in various promising areas, both domestically and internationally, including in indonesia. in the context of sustainability, the transportation sector is the business sector that experienced the deepest contraction out of 17 business sectors recorded by the biro pusat statistik. it was recorded that, during the period from april to july 2020, the transportation and warehousing sector experienced a 30.84 percent decrease, and the growth rate of the 1corresponding author: orcid id: 0009-0008-8974-1660 © 2025 by the authors. hosting by asian finance & banking society. peer review under responsibility of asian finance & banking society, usa. https://doi.org/10.46281/asfbr.v9i1.2647 to cite this article: alang, s. (2025). the accuracy analysis of financial distress model a benchmark of operational performance and firms’ investment. asian finance & banking review, 9(1), 1-8. https://doi.org/10.46281/asfbr.v9i1.2647 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://www.openaccess.nl/en https://doi.org/10.46281/asfbr.v9i1.2647 https://orcid.org/0009-0008-8974-1660 alang, asian finance & banking review 9(1) (2025), 1-8 2 transportation sector is expected to remain slow until the end of this year (ramli & jatmiko, 2020). furthermore, the transportation, warehousing, and logistics sectors in 2022 experienced the highest growth, reaching 19.87%. especially after the covid-19 pandemic, the transportation and logistics sector has been one of the businesses experiencing high growth in recent years (supply chain indonesia, 2024). among these potentials, it encourages every firm to create various innovations to attract the attention of consumers, which will ultimately increase the business profits. in the situation and conditions of the last few years because of implicated the covid-19 pandemic, the investment atmosphere felt by various firms is not the same including some enterprises that have decided to withdraw from the transportation sector competition considering that the firm's operational capabilities are not able to move up significantly amidst business competition, even quite a few of them have started to predict their financial condition by predicting bankruptcy (financial distress) as a method to ensure business capacity and optimize the business operational achievements in the future which of course is expected to attract investors to invest in this transportation sector. the calculation for the financial distress model analysis is classified into several models commonly used in previous research. for instance, robiansyah et al. (2022) found that the altman model is the most effective for predicting bankruptcy in manufacturing companies, outperforming the springate, zmijewski, and grover models. in contrast, meilawati et al. (2023) found that the zmijewski model is the most suitable choice for predicting bankruptcy in the hotel, restaurant, and tourism subsectors, when compared to the springate and zmijewski models. for this reason, this study aims to find out the differences in the level of model accuracy among the modified altman prediction (z-score), springate (s-score), and zmijewski prediction models in predicting financial distress as a model of predicting operational management and investment performance benchmarks in transportation sub-sector firms in the indonesian stock exchange (idx). literature review operational management concept operational management is needed in a business to control operational activities. a business requires supervision of several key elements that support its activities, including finance, marketing, and production, which are integral to operational activities (porter, 2011). broadly speaking, operational management is a strategy used in the arrangement and administration of business operations practices to create maximum efficiency in a corporation (kothari, 2025). handoko (2019, hal. 3) argues that operations production management works to optimally carry out the utilization of resources (called production factors), such as raw materials, machines, labor, equipment, and so on, to transform materials and labor into diverse products or services. initially, it involves the utilization of resources and then includes the processing phase til it creates a product, either of finished goods or services. to ensure that nothing hinders the operational process, a manager must be supervised and responsible for that division. a framework is needed that can categorize and formulate decisions in various operations. financial concepts and bankruptcy analysis (financial distress) myers and pogue (1974) stated that management must ensure that corporate finances are used in accordance with the plan and are consistent with business goals. the most essential of the supply elements in operational management is finance. then, used to produce quality goods and services (akintoye, hardcastle, beck, chinyio, & asenova, 2003). appropriate finances facilitate the process of creating optimal products and services. financial management arrangements, especially cash management, are crucial in the context of inventory turnover; however, they do not eliminate the risk of running out of inventory, which can result in future losses for the firm (nasution, 2023). in addition, with good financial management, the firm's operations and investments will align with the planning that has been set, both in the short and long term. the operational movement of firm investments can be measured and detected through an appropriate and accurate financial analysis model that the firm can use, including bankruptcy analysis (financial distress). according to platt and platt (2002), financial distress is defined as a condition of decline in a firm's financial position before bankruptcy or liquidation. lau (1987) revealed that the deterioration in financial conditions stems from the composition of the balance sheet, specifically when the total assets are smaller than the amount of the firm's debt, rendering the business unable to pay its obligations (mentariningrum & prasetiono, 2022). elloumi and gueyié (2001) stated that a firm's condition of financial distress is characterized by two consecutive years of negative earnings per share (eps). therefore, firms must prevent or minimize the event of financial distress by reviewing financial reports and conducting a financial distress analysis. financial distress indicators that firm management (internal parties) must pay attention to are related to the efficiency and effectiveness of its operations, as stated by hartanto (1984), are: (1) a decrease in sales volume because of consumer moves, demands, or tastes. (2) production costs are worked up. (3) competition in the business climate rises. (4) business expansion of a failed. (5) the collecting receivables function is ineffective. (6) lack of contributions or funding facilities (credit). (7) dependence on corporate receivables is high. the indicators that external parties must pay attention to include: (1) a decrease in dividends distributed to shareholders. (2) losses corporation, and a continuous decline in the point of lower. (3) one or more business units which has stopped their operational activities. (4) layoffs. (5) resignation of top executives. (6) decrease in the capital market of stock prices (teng, 2002). financial distress analysis model elements to express bankruptcy prediction analysis can use a model. this model must ensure that the construction meets the structure, form, and content, and has meaning, with parameters limited to specific measures in decision-making (husain, 2019). several financial distress analysis models that are pretty popular and used in this study are:  altman z-score; i.e., with the name ‘altman model analysis’ (1968); calculated with the equation formula adhered: 𝑍 = 1.2𝑋1 + 1.4𝑋2 + 3.3𝑋3 + 0.6𝑋4 + 1.0𝑋5 ... (1) alang, asian finance & banking review 9(1) (2025), 1-8 3 explanation: 𝑋1 is working capital divided by total assets 𝑋2 is retained earnings (re) divided by total assets 𝑋3 is earnings before interest and taxes (ebit) divided by total assets 𝑋4 is the book value of equity divided by the book value of total debt 𝑋5 = sales to total assets (ta) the assumptions: (i) if the z index score is < 1.81, then the firm is experiencing financial distress; (ii) if the z index score is > 2.99, then the firm is not experiencing financial distress; (iii). if the index score z is between 1.81 and 2.99, then it falls within the grey area (the firm is experiencing minor financial problems and has a probability of experiencing financial distress); and (iv) the cut-off value for this index is 2.675.  modified – iii, altman model analysis (altman, hartzell, & peck, 1998); in this model, altman eliminates the variable 𝑋5 (sales/total assets) because this ratio varies significantly across industries with different asset sizes. the calculated equation formula is: 𝑍" = 6.56𝑋1 + 3.26𝑋2 + 6.72𝑋3 + 1.05𝑋4 ... (2)  altman (1968) is a model constructed by re-evaluating and redesigning the altman z-score model. altman (1968) utilized a sample based on the altman z-score model in 1968 by adding thirteen financial ratios. the calculated equation formula is: 𝐺 − 𝑆𝑐𝑜𝑟𝑒 = 1.650𝑋1 + 3.404𝑋2 + 0.016𝑅𝑂𝐴 + 0.057 ... (3) explanation: 𝑋3 = return on assets (roa) the assumptions: (i) if a firm gets a g-score <-0.02, it is an enterprise that will or has experienced financial distress; and (ii) if a firm gets a g-score ≥ 0.01, it is categorized as a firm that is not experiencing financial distress.  gordon l.v. springate (1978) is a model that uses the same method as altman. springate offers four ratios that are guaranteed to differ between firms in distress and those that are not. the calculated equation formula is: 𝑆 = 1.03𝐴 + 3.07𝐵 + 0.66𝐶 + 0.4𝐷 ... (4) a is working capital divided by ta b is ebit divided by ta c is earnings before taxes (ebt) to current liabilities (cl) d is sales to ta the assumptions: (i) the cut-off value criteria for the springate model is 0.861; if the score is < 0.861, it indicates that the corporation will experience financial distress; and (ii) if the score is > 0.861, it indicates that the corporation will not impress financial distress  mark e. zmijewski (1984) is a model that utilizes the liquidity ratio analysis, leverage, and measures a firm's performance. f-test indicators against the ratio of group 39 rate of return, liquidity, turnover, fixed payment coverage, leverage, firm size, trends, and stock return volatility indicate significant differences among healthy and unhealthy firms. the calculated equation formula is: 𝑍 = −4.3 – 4.5𝑋1 + 5.7𝑋2 – 0.004𝑋3 ... (5) explanation: 𝑋1 is earnings after tax (eat) to ta 𝑋2 is total debt to ta 𝑋3 is current assets to cl the assumptions: (i) the criteria in this model are that if the score obtained is ≥ 0 (zero), then the firm will indicate financial distress; and (ii) if the score obtained is ≤ 0 (zero), then the firm has no potential to indicate financial distress. calculating accuracy level to evaluate which financial distress model is the best predictor among the models to be used, a comparison between predictions and sample categories is carried out on all existing samples after all samples have been calculated, the results of a summary of correct and incorrect predictions are obtained, and through the summary of forecasts, the accuracy level of each model can be determined. the accuracy rate indicates a high percentage of the model's predictions that are correct for all existing firms. the calculated equation, as an accuracy level formula, adheres: = 100 ∑ 𝑥𝑖𝑖𝑖 𝑛 ... (6) (galdi & tagliaferri, 2019) in the calculation of each model, there is always a possibility of prediction error. therefore, in calculating the accuracy level of each model, the error level or error rate of each model is also considered, with the equation:  error type i is an error that prevails if the model predicts that the company is experiencing distress when, in fact, the corporation is not experiencing distress. 𝐸𝑟𝑟𝑜𝑟 𝑇𝑦𝑝𝑒 − i = number of 𝑒𝑟𝑟𝑜𝑟 𝑡𝑦𝑝𝑒−i number of samples 𝑥100% ... (7)  error type-ii is an error that prevails if the model predicts that the company is not experiencing distress when, in fact, the corporation is experiencing distress. alang, asian finance & banking review 9(1) (2025), 1-8 4 𝐸𝑟𝑟𝑜𝑟 𝑇𝑦𝑝𝑒 − ii = number of 𝑒𝑟𝑟𝑜𝑟 𝑡𝑦𝑝𝑒−ii number of samples 𝑥100% ... (8) (sun, li, huang, & he, 2014) relevant research research conducted by robiansyah et al. (2022) analyzed the comparison of the feasibility level of the bankruptcy prediction model when it is taken to foresee the company, with the represent yields that of the four models studied, to predict the bankruptcy of manufacturing firmscompanies registered on the indonesia stock exchange the springate model cannot be used, because it has a significance probability is 0.175 (greater than 0.05). research conducted by meilawati et al. (2023) analyzed the comparison of altman, springate, and zmijewski models in predicting bankruptcy in hotel, restaurant, and tourism sub-sectors companies for the period 2017-2021, with the findings arguing that the altman, springate, and zmijewski models are very different from each other in predicting bankruptcy. the zmijewski model is the most accurate, with an accuracy rate of 94.5 percent. materials and methods based on the research purpose, this study is a quantitative descriptive approach, i.n, research conducted to determine the value of a variable (sugiyono, 2023, hal. 11). this study was conducted by accessing data on the indonesia stock exchange (idx), i.e., www.idx.co.id and the official website of each corporation. the subject research is firms in the transportation sub-sector registered at idx for utilization (4 a four-period time. based on the data type, this study is categorized as secondary, specifically research that utilizes numerical data (quantitative). by its form, quantitative data can be processed using mathematical calculations and/or statistical analysis (abdullah et al., 2022). the sampling method is purposive. table 1. determination of population and sample of transportation sub-sector firms total population 45 c r it e ri a transportation sub-sector firms that do not publish complete financial reports for four periods (20) transportation sub-sector firms listed on the indonesia stock exchange (idx) that publish financial reports in usd currency (13) number of firm samples 12 c r it e ri a sample used 12 x 4 (period) 48 category 0 (distress) of firms* 19 category 1 (non distress) of firms* 29 *)firm observation data details in appendix source: author’s ellaborated (2025) to establish that researchers can analyze easily, researchers use the adhere phases: calculate and analyze of: modified altman z-score, springate, zmijewski models data entry of model analysis financial distress prepare to data processing start analyzing and concluding and the accuracy level finish figure 1. flowchart of financial distress prediction model this research is comparative because the researcher aims to identify the differences in model accuracy levels among the modified altman (z-score), springate (s-score), and zmijewski prediction models in predicting financial distress. the http://www.idx.co.id/ alang, asian finance & banking review 9(1) (2025), 1-8 5 goal is to establish benchmarks for assessing the quality of a firm's operations and investments. results and discussions after determining the predetermined sample, transportation sub-sector companies were identified that met the research criteria. the following is a list of firms that were used as samples in this study: table 2. sample data category 0 (distress) and 1 (non-distress) distress category data observation issuer code period of nondistress category data observation issuer code period of issuer code period of 1 cmpp y 1 aksi y 20 safe y 2 y-1 2 y-1 21 y-3 3 lrna y-1 3 y-2 22 sdmu y-3 4 y-2 4 y-3 23 tmas y 5 y-3 5 assa y 24 y-1 6 mira y 6 y-1 25 y-2 7 y-1 7 y-2 26 y-3 8 y-2 8 y-3 27 weha y 9 y-3 9 bird y 28 y-1 10 safe y-1 10 y-1 29 y-2 11 y-2 11 y-2 y = current period y-1 = period of 1 year ago 12 sdmu y 12 y-3 y-2 = period of 2 years ago 13 y-1 13 cmpp y-2 y-3 = period of 3 years ago 14 y-2 14 y-3 15 taxi y 15 lrna y 16 y-1 16 nely y 17 y-2 17 y-1 18 y-3 18 y-2 19 weha y-3 19 y-3 source: author's elaboration from idx data (2025) descriptive data is used to describe or explain a summary of research variables without connecting or comparing them with other variables.  calculation of accuracy and error modified altman z-score table 3. modified altman z-score model (error type) recapitulation identification prediction total distress non distress fact distress 12 7 19 non distress 15 14 29 total 27 21 48 accuracy level test results accuracy scores accuration 54.17% error type-i 14.58% error type-ii 31.25% source: author’s calculated (2025) table 3 shows that, out of a total of 19 samples in category 0 (distress), the modified altman z-score model predicts 12 samples experiencing financial distress. in comparison, seven other samples do not exhibit financial distress. therefore, there is an error in this model that predicts that seven samples do not experience financial distress. meanwhile, from the 29 samples in category 1 (non-distress), the modified altman z-score model predicts that 14 samples do not experience financial distress, while 15 other samples indicate financial distress. therefore, there is an error in this model, which predicts that 15 samples will experience financial distress when, in reality, this is not the case. therefore, it can be inferred that the modified altman z-score model yields correct predictions for 26 samples and incorrect predictions for 22 samples. the accuracy level of the modified altman z-score model is 54.17%. the error rate of this model for error type i is 14.58%, while the error rate for error type ii is 31.25%.  calculation of accuracy and error type of springate s-score model table 4. springate s-score model error type recapitulation identification prediction total distress non distress fact distress 19 19 non distress 24 5 29 total 43 5 48 accuracy level test results accuracy scores accuration 50.00% error type-i 0.00% alang, asian finance & banking review 9(1) (2025), 1-8 6 recapitulation identification prediction total distress non distress error type-ii 50.00% source: author’s calculated (2025) table 4 shows that, out of a total of 19 samples in category 0 (distress), the springate s-score model predicts 19 samples experiencing financial distress, and no samples are not experiencing financial distress. therefore, there is no error in this model in predicting samples in category 0 (distress). meanwhile, from the 29 samples in category 1 (non-distress), the springate s-score model predicts that five samples do not experience financial distress, while 24 other samples indicate financial distress. therefore, there is an error in this model, as it predicts that 24 samples will experience financial distress; in reality, this is not the case. therefore, it can be inferred that the springate s-score model yields correct predictions for 26 samples and incorrect predictions for 22 samples. the accuracy level of the springate s-score model is 50%. there are no errors in this model for error type i, while error type ii occurs at a rate of 50%.  calculation of accuracy and error type of the zmijewski model table 5. zmijewski model error type recapitulation identification prediction total distress non distress fact distress 9 10 19 non distress 4 25 29 total 13 35 48 accuracy level test results accuracy scores accuration 70.83% error type-i 20.83% error type-ii 8.33% source: author’s calculated (2025) table 5 shows that, out of a total of 19 samples in category 0 (distress), the zmijewski model predicts that nine samples will experience financial distress. in comparison, the remaining 10 samples do not exhibit financial distress. therefore, there is an error in 10 samples of this model in predicting samples in category 0 (distress). meanwhile, from 29 samples in category 1 (non-distress), the zmijewski model predicts that 25 samples do not indicate financial distress, and four other samples experience financial distress. therefore, there is an error in this model, as it predicts that four samples will experience financial distress, whereas in reality, this is not the case. the zmijewski model yields correct predictions for 34 samples and incorrect predictions for 14 samples. the accuracy level of the zmijewski model is 70.83%. the error rate of this model for error type i is 20.83%, while the error rate for error type ii is 8.33%.  summary of accuracy and error level test yields table 6. accuracy and error level test yields (recapitulation) test result scoring model analysis altman modified springate zmijewski accuracy level 54.17% 50.00% 70.83% error type-i 14.58% 0.00% 20.83% error type-ii 31.25% 50.00% 8.33% source: author’s calculated (2025) the yields of the study conducted on transportation sub-sector firms registered on the indonesia stock exchange over four periods indicate that the altman modified z-score prediction method ranks second as a suitable method for measuring financial distress in transportation sub-sector firms, with an accuracy rate of 54.17% and an error rate below 35%. in contrast, the highest accuracy rate is obtained from the zmijewski prediction method calculation, while the springate method yields the lowest accuracy rate among the three. these findings are consistent with those of robiansyah et al. (2022), who concluded that the springate model is not suitable for predicting corporate bankruptcy, as it has no statistically significant effect on manufacturing companies. additionally, it states that the zmijewski model is the most accurate, producing a high level of accuracy of 94.5% in hotels, restaurants, and tourism sub-sector companies (meilawati, damayanti, & ilhami, 2023). the zmijewski model is widely exploited to measure firm performance and investments utilizing company financial ratio analysis. conclusions this study investigates to wants to find out the differences in the level of model accuracy among the modified altman prediction (z-score), springate (s-score), and zmijewski prediction models in predicting financial distress as a model of predicting operational management and investment performance benchmarks from transportation sub-sectors firms registered on the indonesia stock exchange (idx) for the 4-periods, it can be drawn: (1) from the assessment of the altman modified z-score model analysis, it accurately predicts 26 samples out of 48 existing samples so that it has an accuracy level of 54.17%. (2) from the assessment of the springate s-score model analysis, it accurately predicts 24 samples out of 48 existing samples, so that it has an accuracy level of 50%. (3) while the assessment of the zmijewski model analysis alang, asian finance & banking review 9(1) (2025), 1-8 7 accurately predicts 34 samples out of 48 existing samples, it has an accuracy level of 70.83%. the conclusion from three model bankruptcies is that the zmijewski model is the most appropriate for firms to use if they want to attract potential investors to invest, and is used to determine the prediction of financial distress as a method for predicting the benchmark for the quality of operational and investment companies in the transportation sub-sectors firms registered on the idx for the 4-periods. this study has the drawback of producing the lowest model accuracy percentage compared to the previous studies referred to, and also, the total number of samples observed to predict the three models tested was small. this study suggests that additional financial distress prediction models, such as ohlson, grover, and others, can be used to compare and contrast the results of financial distress analyses. the sample should be expanded in future studies. author contributions: conceptualization, s.a.; methodology, s.a.; software, s.a.; validation, s.a.; formal analysis, s.a.; investigation, s.a.; resources, s.a.; data curation, s.a.; writing – original draft preparation, s.a.; writing – review & editing, s.a.; visualization, s.a.; supervision, s.a.; project administration, s.a.; funding acquisition, s.a. authors have read and agreed to the published version of the manuscript. institutional review board statement: ethical review and approval were waived for this study because the research does not deal with vulnerable groups or sensitive issues. funding: the authors received no direct funding for this research. acknowledgements: we acknowledge the indonesian stock exchange (idx), particularly the transportation sub-sector firms, for providing the financial statements of the relevant firms on their official websites, which helped in calculating and conducting this analysis. informed consent statement: informed consent was obtained from all subjects involved in the study. data availability statement: the data presented in this study are available on request from the corresponding author. the data are not publicly available due to restrictions. conflicts of interest: the authors declare no conflict of interest. references abdullah, k., jannah, m., aiman, u., hasda, s., fadilla, z., ardiawan, k. n., & sari, m. e. 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(1984). methodological issues related to the estimation of financial distress prediction models. studies on current econometric issues in accounting, 22, 59-82. https://doi.org/10.2307/2490859 publisher’s note: asian finance & banking society stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2025 by the authors. licensee asian finance & banking society, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). asian finance & banking review (p-issn 2576-1161 e-issn 2576-1188) by asian finance & banking society is licensed under a creative commons attribution 4.0 international license. http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ asian finance & banking review 6(1) (2022), 33-41 33 finance & banking review asfbr vol 6 no 1 (2022) p-issn 2576-1161 e-issn 2576-1188 available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/asfbr published by cribfb, usa conceptual review of microfinance and women household, economic, and social empowerment of microfinance borrowers tasnuba haque (a)1 chamhuri siwar (b) abul bashar bhuiyan (c) (a) lecturer, faculty of business and accountancy, universiti selangor, shah alam, malaysia; e-mail: haquebornee@gmail.com (b) professor emeritus & senior research fellow at institute for environment and development, universiti kebangsaan malaysia, bangi 43600, selangor, malaysia; e-mail: csiwar@ukm.my (c) associate professor, faculty of business and accountancy, university selangor, shah alam, malaysia; e-mail: bashariuk@gmail.com a r t i c l e i n f o article history: received: 22nd october 2022 accepted: 18th december 2022 online publication: 30th december 2022 keywords: microfinance and women household, economic, and social empowerment choice jel classification codes: f65 a b s t r a c t the poor women are ignored in most parts of the society, having no opportunities for self-sufficiency, losing of their self-confidence and self-supporting; in turn, leads to suffer of their psychological, social, and mental health problems. therefore, the study aims to investigate rigorous review of literature on the women empowerment for developing of a conceptual framework of microfinance and women household, economic, and social empowerment of the microfinance borrowers in the world. the present study used existing available materials and resources from reputed online data based such as google scholar, science direct, scopus, web of science data based etc. the present study findings revealed that the poor women are marginalized, lack chances for self-sufficiency, and depend on charity or welfare. without means to support themselves, poor women lose their self-confidence, and this disposition can lead to psychological, social, and mental problems. the study also found that the women can be empowered through encouraging and developing skills for self-sufficiency. the study also revealed that the major problems facing the poor and the lower-income group was access to credit. their lack of assets for collateral and financial records, and limited credit history make obtaining credit from formal financial institutions almost impossible. the concluded that the microfinance can be a powerful and effective way of access to credit of the poor has been rapidly expanding in hopeless and helpless societies accordingly. finally, the present study developed a conceptual framework based above summary of findings to do a practical investigation to further examine the relationship between microfinance and women household, economic, and social empowerment of the microfinance borrowers in the world. © 2022 by the authors. licensee cribfb, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). introduction empowerment involves encouraging and developing self-reliance skills with a focus on eliminating the need for future charity or well-being. moreover, the poor women are ignored in most parts of the society. they are marginalized and have no opportunities for self-sufficiency, and thus, become dependent on charity or welfare (bhuiyan, siwar, & talib, 2012). hence, poor women lose their self-confidence because they cannot be fully self-supporting; denied opportunities lead to deprive poor women from the pride of accomplishment; and a such situation, in turn, leads to psychological, social, and mental health problems (haque, siwar, bhuiyan, & joarder, 2019). the major problems facing the poor and the lowerincome group was access to credit. their lack of assets for collateral and financial records, and limited credit history make obtaining credit from formal financial institutions almost impossible (basher, 2010; hossain, 1988; hassan & tufte, 2001; morduch, 1999; schreiner, 1999). the poor are tied to low productivity and are usual involved in self-employed economic activities because of the lacks of capital. thus, providing the poor with credit generally helps them minimize the poverty rate. microfinance has been recognized as a powerful and effective way of access to credit of the poor has been rapidly expanding in hopeless and helpless societies all over the world over the past few decades (basher, 2010; hossain, 1988; hassan & tufte, 2001; morduch, 1999; schreiner, 1999). 1corresponding author: orcid id: 0000-0002-4108-0719 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/asfbr.v6i1.1891 to cite this article: haque, t., siwar, c., & bhuiyan, a. b. (2023). conceptual review of microfinance and women household, economic, and social empowerment of microfinnace borrowers. asian finance & banking review, 6(1), 33-41. https://doi.org/10.46281/asfbr.v6i1.1891 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/asfbr.v6i1.1891 https://orcid.org/0000-0002-4108-0719 https://orcid.org/0000-0003-0528-1094 https://orcid.org/0000-0003-1763-124x haque et al., asian finance & banking review 6(1) (2022), 33-41 34 the pioneer of microcredit muhammad yunus manifests his anxiety that profit orientation would give priority shareholder’s interest compare to the poor (salmon, 2011). recently, the effects of microfinance have been questioned, and many studies state that the effects of microfinance differ between positive, non-effects and even negative effects (becchetti & castriota, 2011; cull, demirgüç-kunt, & morduch, 2011; islam, nguyen, & smyth, 2015; raha, osbahr, & garforth, 2013; rokhim, sikatan, lubis, & setyawan, 2016). moreover, it was not even considered as microcredit that save poor from loan shark (business, 2007; economist, 2008; malkin, 2008; mohammad yunus, 2010). studies indeed infer that if mfis exclude the poorer clients (g. woller, 2002; g. m. woller, dunford, & woodworth, 1999).as a result, many mfis transform and commercialize from not-for-profit to for-profit institutions for broader credit access in different region (burgis, 2008; christen & cook, 2001; gokhale, 2009a, 2009b; ledgerwood & white, 2006; nestor, 2011; olivarespolanco, 2005; g. woller, 2002). despite, these some believe that those mfis are in danger as they act nearly predatory money lenders and fear of losing original mission through chasing profits for institutional investors (i. ahmed, 2018; i. ahmed, ibrahim, bhuiyan, & mohd, 2018). the literature also argues that the impact of microfinance works differently in one context and depends on population density, attitudes towards debt, group cohesion, business development, financial literacy, financial service providers and others. as the current study notes that poor women are marginalized, lack chances for self-sufficiency, and depend on charity or welfare. without means to support themselves, poor women lose their selfconfidence, and this disposition can lead to psychological, social, and mental problems. empowerment was the way to achieve basic opportunities for poor women. women can be empowered through encouraging and developing skills for selfsufficiency, which could result in eliminating the future needs for charity or welfare among individuals of the group. in such circumstances, this study will have filled above gap by deep study of review of literature on the women empowerment and developed a conceptual framework of microfinance and women household, economic, and social empowerment of the microfinance borrowers in the world. this research can draw out a future direction for the effective use of microcredit for income generating activities (igas) for ensuring of health nutrition, basic education and sustainable living of the poor women in all over the world. background of the study concept of microfinance microfinance has been recognized as a powerful and effective tool for combating poverty; the poor access to credit has been rapidly expanding over the past few decades in the area of hopeless and helpless society all over the world. it was also noted in the united nations world summit outcome document, 2005, (united nation 2005). according to the united nations, microfinance and micro-credit programs have recognized the need to provide financial services, especially to the poor. on the other hand, the impact assessment showed that microfinance helps the poor, although not all participants can benefit equally. an early study by grameen bank found support for the poor, especially women, through empowerment and income generation. microfinance is recognized as an effective and efficient tool in the fight against poverty. poor access to credit has grown rapidly in recent decades in a hopeless and helpless society around the world (basher, 2010; hossain, 1988; kabir hassan & tufte, 2001; morduch, 1999; schreiner, 1999). yunus et al. described that grameen bank, founded in 1976, has both pioneered the development of micro-finance, and created nearly 30 businesses designed to alleviate poverty. the article traces the gradual development of grameen's expertise in formulating social business models, which require new value propositions, value constellations and profit equations, and as such, resembles a business model innovation. the article presents five lessons learned from this experience: three are similar to those of conventional business model innovation that challenges conventional thinking, finding complementary partners and undertaking continuous experimentation; two are specific to social business models: recruiting social-profit-oriented shareholders, and specifying social profit objectives clearly and early. they suggest new business models where stakeholders replace shareholders as the focus of value maximization could empower capitalism to address overwhelming global concerns (yunus, moingeon, & lehmann-ortega, 2010). hartarska and nadolnyak examined whether microfinance rating agencies were able to impose market discipline on microfinance institutions (mfis) during the period of 1998-2002. the results indicated that not all rating agencies had the same impact. rating by some rating agencies helped mfis raise funds, while rating by other agencies did not. the evidence also suggests that subsidizing rating did not help mfis raise more funds (hartarska & nadolnyak, 2008). microfinance refers to the provision of microloans with savings, insurance, and service, whereas microcredit offers only a small loan. moreover, “microcredit is a program designed to extend small loans to very poor people for selfemployment projects that generate income, allowing them to care for themselves and their families” (daley-harris, 2005). “microcredit is a component of microfinance which was used to provide a small credit to the poor people, but microfinance also involves additional non-credit financial service such as savings, insurance, pensions, and payment service” (buckley, 1997). in addition, “microfinance is the practice of offering small, collateral-free loans to the members of cooperatives who otherwise would not have access to the capital necessary to begin a small business or other income generating activities” (hossain, bose, & ahmad, 2004). finally, microcredit is a provision of access to small amounts of credit to the poor and others who do not have assets for collateral, financial records, and credit history. borrowers can use the loan obtained through microcredit for igas to alleviate them to rise from poverty and to ensure livelihood development. these developments can result in improving good health, accessing children’s education, achieving skills, acquiring assets, and taking part in social activities. concept of women empowerment the term empowerment comes from the word “empower,” which means “to give power or authority to someone.” moreover, empowerment is an intrinsic quality of a person, which cannot be bestowed by a third party. the behaviour of an empowered haque et al., asian finance & banking review 6(1) (2022), 33-41 35 person is considered to undergo a change. briefly, empowerment is a process that enables one to gain power, authority, and influence over others. scholars have given their opinion on the concept of empowerment. people assume “control and mastery over their lives in the context of their social and political environment.” some researchers describe empowerment as a continuous, on-going, and interactive process that leads to the enhancement of abilities and a wider scope for choice and action of an individual (al-mamun & mazumder, 2015; al-shami, majid, rizal, muhamad, & rashid, 2015; al-shami, majid, mohamad, & rashid, 2017; ismail, 2001). thus, empowerment leads to equity and well-being of the individual and the community (wallerstein, 1992). moreover, “the empowerment as a process of enabling or authorizing an individual to think, behave, and take action and controlling work in an autonomous way. it involves some degree of personal development. individuals become empowered when they obtain the right to determine choices in life and to influence the direction of change through the ability to gain control over material and non-material resources. the world bank ‘empowerment source book’ also defines empowerment in the same way” (rowlands, 1997). by contrast, women empowerment is an active and multi-dimensional, process, which enables women to realize their full identity and power in all spheres of life. power is neither a commodity to be transacted nor alms that can, be given away. power has to be acquired, and once acquired, power needs to be exercised, sustained, and preserved. there are a number of studies about the issues of women empowerment. stromquist (1995) explains that empowerment includes both cognitive and psychological elements. it involves “women’s understanding of their conditions of subordination and the causes of such conditions at both micro and macro levels of society. it involves understanding the self and the need to make choices that may go against cultural and social expectations” (stromquist, 2002). moreover, women empowerment is a process of improving the status and abilities of women to enable them to lead their lives in an autonomous way. women empowerment is a complicated and continuous process, which aims to change the way of thinking of the whole society to ensure the equal enjoyment of human rights for all. women empowerment is a continuous process of increasing the economic, social, political, and psychological strengths (rowlands, 1997; stromquist, 2002; wallerstein, 1992). finally, the study summarizes the concept of women empowerment as a process that allows one to gain knowledge, power, skill-sets, and attitude that are needed to cope with the changing world and the circumstances in the environment in increasing the productivity of self, family, and the society as a whole. linkage of microfinance and women empowerment microfinance is considered the provision of access to small amounts of credit to the poor where 95% of microcredit borrowers are women of the mfis. the women are ignored in most of society, marginalized and have no opportunities for self-sufficiency, situation in turn leads to psychological, social and mental health problems. the empowerment of women is a means of achieving the basic opportunities for poor women. empowerment involves encouraging and developing selfreliance skills with a focus on eliminating the need for future charity or well-being. (stromquist, 2002). moreover, women empowerment is a process of improving the status and abilities of women to enable them to lead their lives in an autonomous way. women empowerment is a complicated and continuous process, which aims to change the way of thinking of the whole society to ensure the equal enjoyment of human rights for all. women empowerment is a continuous process of increasing the economic, social, political, and psychological strengths (rowlands, 1997; stromquist, 2002; wallerstein, 1992). finally, the study summarizes the concept of women empowerment as a process that allows one to gain knowledge, power, skill-sets, and attitude that are needed to cope with the changing world and the circumstances in the environment in increasing the productivity of self, family, and the society as a whole. literature review as women comprise half of society, they have the right to move into the main stream of development. their ability to take advantage of opportunities to increase their income or economic status, to protect themselves against other risks, and to increase their ability to cope with risks when they occur was very important. the reduction of poverty was partly a process of increasing income and economic stability, which enables the fulfilment of basic needs and access to different kinds of service. poverty reduction has come into the forefront with the revolution of microcredit when yunus realized that women empowerment was an essential and a precondition, as well as with men, to remove poverty from the society. studies revealed the extent to which microfinance has contributed to women empowerment in controlling family decision. for instance, microfinance of grameen bank allowed women borrowers to increase their involvement in controlling assets and social welfare (zaman, 1999). moreover, the study of abdullah-al-mamun et al. examined how the participation in the microcredit program of aim affected the employment rate of hard-core poor households and community in peninsular malaysia in 2011. the participation in the microcredit program of aim increased employment, which generated opportunities at the household and community levels. the policy may be reviewed and re-organized to increase the employment rate and income-generating opportunities by providing appropriate training and diversified, flexible loan offers (mamun, wahab, hossain, & malarvizhi, 2011). khandker examined the effects of microfinance on poverty reduction at both the participant and aggregate levels using panel data from bangladesh. the results suggested that access to microfinance contributes to poverty reduction, especially for female participants, and to overall poverty reduction at the village level. thus, microfinance helps not only poor participants, but also the local economy (khandker, 2005). hazarika and sarangi (2008) examined the effect of household access to microcredit on work by 7 to 11 year old children in rural malawi. microcredit organizations fostered household enterprises, which engaged child labour. thus, the study also looked into whether access to microcredit increased child labour. during the peak season of labour demand, household access to microcredit, which was measured as selfassessed credit limits at microcredit organizations, raised the probability of child work in households with average landholdings and retail sale enterprises (hazarika & sarangi, 2008). angeles and hill in 2009 conducted a parallel field haque et al., asian finance & banking review 6(1) (2022), 33-41 36 research in two peri-urban villages in naga and valencia in the philippines. the article applied gender analysis to understand livelihood diversification indicated in agrarian change. the role of state organizations and ngos in (re)producing gender differences, hierarchies, roles, and identities within agrarian settings brings poststructuralist and postcolonial theory in the political economy to explore how gender was at stake in daily livelihood struggles. the study showed how structural constraints and institutional discourses still rendered livelihood diversification a gendered project and how the state and other development organizations perpetuated gender inequalities and rein scribed normative gender discourses (angeles & hill, 2009). bose and ahmad in 2009 described two ways to analyse how women work. the first way depicted the patterns of the work of women and analysed the factors that influenced the gender division of labour. the second way showed a women empowerment index developed from the 2000 survey data on intra-household decision-making in different spheres and explored its relationship with the work of women. their study revealed that enabling and improving the quality of education for women was necessary to increase their participation in marketing activities, where the gender disparity in earnings was less. moreover, developing desirable social and institutional infrastructures enabled women to move outside the home to participate in economic and social activities and to reduce the burden of their domestic work (bose, ahmad, & hossain, 2009). moreover, zahra et al. in 2009 observed that social entrepreneurship was the subject of several studies. they discussed its contributions to creating social wealth, offered a typology of the search processes of entrepreneurs that led to the discovery of opportunities for creating social ventures, and articulated the major ethical concerns that social entrepreneurs might encounter. their study concluded by outlining implications for entrepreneurs and advancing an agenda for future research, especially on the ethics of social entrepreneurship (zahra, gedajlovic, neubaum, & shulman, 2009). serrona and yu in 2009 discussed that one of the potential solutions in social and environmental sustainability in municipal solid waste management in metro manila, philippines was the combination of community-based recycling and sound landfill management strategies. the combination emphasized recycling as a source of livelihood, and proper landfill management improved the aesthetic and environmental quality of disposal facilities in urban areas. their study showed that development interventions in disposal sites, such as wte, were not opposed by host communities as long as alternative livelihood opportunities were provided. regulating the flow of waste-pickers into the landfill has advantages, such as improved income and security. the felt needs, such as the provision of financial support or capital for junkshop operation and skills training, were also articulated. overall, a smooth relationship between the local government and community associations paid well in a transitioning landfill management scheme such as payatas (serrona & yu, 2009). bhole and ogden in 2010 noticed that the group and individual lending with strategic default suggested that unless group members can impose costly social sanctions on one another, or unless the bank uses cross-reporting mechanisms, group lending may do worse than individual lending. if the amount that a successful borrower owes for his defaulting partner is optimally determined and the penalty is allowed to vary across group members, then expected borrower welfare is strictly higher with group lending when both group and individual lending are feasible. moreover, group lending is feasible for a greater range of the opportunity cost of capital even without any social sanctions or cross-reporting. however, a robust collusion occurred among borrowers (bhole & ogden, 2010). shimamura and lastarria cornhiel in 2010 evaluated the effects of participating in agricultural credit program on the school attendance of children in rural malawi. their paired-site sampling survey revealed that credit decreased school attendance for young girls. this finding raised concerns that young girls were exploited through child labor either at home or in the field because working adults became more involved in igas that were financed by credit. however, the data did not show clear evidence that young girls in households that obtained credit, stayed at home to do household chores or to work in the fields. the study only found simultaneous occurrence of attending school and taking responsibilities for domestic chores by young children. therefore, credit uptake delayed the realization of this concurrence among young girls and led to delayed school enrolment (shimamura & lastarria-cornhiel, 2010). misturelli and heffernan in 2010 noticed that poverty was often presented as an evolving concept linked to dominant development paradigms. changes in the meaning of specific topics that comprised the definitions of poverty have been largely overlooked. the authors adopted a synchronic approach to evaluate changes contained within 159 definitions of poverty from 1970s to 2000s. their study revealed that component terms were investigated for their stability in meaning through the application of the concepts of the signifier and signified of de saussure. the results illustrated that terms often did not share the same significance (misturelli & heffernan, 2010). moniruzzaman in 2011 analyzed the experiences of two major ngos in bangladesh and argued that community development paid greater attention to the effects of empowering inputs, such as microcredit, than the internal management of the group. the study examined the serious defects that may have direct negative effects on empowering outcomes. the study argued that paying greater attention to the internal management of the groups can make the group approach more effective in community development (moniruzzaman, 2011). hermes et al. in 2011 used stochastic frontier analysis to examine whether outreach to the poor and the efficiency of mfis had a trade-off. they found convincing evidence that outreach was negatively related to the efficiency of mfis. more specifically, they found that mfis that have a lower average loan balance (a measure of the depth of outreach) were also less efficient. evidence also showed that mfis with more women borrowers as clients (again, a measure of the depth of outreach) were less efficient. their results of the study remained robustly significant after adding a number of control variables (hermes, lensink, & meesters, 2011). similarly, hearn and piesse in 2011 assessed the effect of stock exchange funding in the shari'ya compliant islamic economy of sudan. evidence indicated that although islamic financial instruments have considerable potential in facilitating development finance through partnership, development finance was better achieved by the banking system than the khartoum stock exchange. a case study of the sudan telecommunications company showed that larger firms that can cross-list elsewhere were likely to choose regional over domestic markets, and thus, benefit from the lower costs of equity. chan and ghani in 2011 discussed if microfinance programs reached the intended target in vulnerable remote villages, and haque et al., asian finance & banking review 6(1) (2022), 33-41 37 whether borrowers improved their lives through microfinance. seventy-two borrowers from three villages were studied. remote villagers living below the poverty line were reached. ninety-three per cent of the borrowers observed an increase in income, assets, and spending on family members. improvement in non-income aspects was also reported. hence, small loans can encourage the development of rural enterprise, skills, and confidence, and the social standing of rural women (chan & ghani, 2011). esnard-flavius and aziz in 2011 examined the relationship between microcredit, microenterprises, and the social welfare of the rural poor in north-eastern trinidad. guided by the main propositions of social capital theory, the researchers conducted 45 semi-structured interviews with active participants or clients within a case study framework. the fragmented social relations within the network, conflict, distrust, and the loose structure of the program limited the effects of access to microcredit on social welfare and the financial potential of the lending organization (esnard-flavius & aziz, 2011). ahmed and siwar in 2011 examined if rural women in bangladesh had a lower socio-economic status than men even if they contributed significantly to their families. rural women had limited access to income generation and social activities because of social, cultural, and religious barriers. the participation of rural women in decision-making regarding family matters was very low. the study discussed the relationship between microcredit, igas, awareness, and women empowerment, and highlighted a review of the existing evidence on the role of microcredit program in developing socioeconomic status and poverty alleviation(f. ahmed, siwar, & idris, 2011a). ahmed and siwar described that women, who constituted almost half of the total population of bangladesh, are victims of socio-economic inequality and gender disparity. women were also economically dependent, vulnerable, and socially discriminated. their study focused on the status of women in bangladesh. however, the government has taken many initiatives to ensure the political rights and to increase the awareness, empowerment, and participation of vulnerable and disadvantaged women (f. ahmed, siwar, & idris, 2011b). a microcredit program was designed to improve the socio-economic status of rural women in bangladesh. an examination of the relationship among microcredit programs, vulnerability, and sustainability livelihood indicated the improved socio-economic well-being and sustainable livelihood of rural women who participated in microcredit programs of bangladesh (ahmed, siwar, & idris, 2011c). ahmed and siwar pointed out that microcredit programs provided small loans to the very poor to undertake self-employment and other financial and business activities. these activities should give them the capacity to care for themselves and their families and to achieve a level of independence. their study examined how microcredit programs contributed to the participation in microcredit program for their development. the paper also discussed the participation of women in microcredit programs of ngos, such as gb, brac, and asa (ahmed, siwar, & idris, 2011d). in addition, ahmed and siwar stated that rural women in bangladesh are the most deprived in the society, and most rural women are extremely poor. the study examined the extent of changes in the livelihood status of rural women through their involvement in microcredit programs in bangladesh. the study revealed that after joining the microcredit program, the rural women engaged themselves in igas and, consequently, improved their livelihood status significantly (ahmed, siwar, idris, & begum, 2011). moreover, the monthly average income of the respondents with credit was us$27.6, which was three times higher than that of the respondents without credit, which was us$7.9. the increased income of the women borrowers contributed significantly in improving the income level of their households, and thus, ,help them reduce vulnerability more effectively than the women who did not borrow (ahmed, siwar, idris, & mia, 2011). hearn and piesse in 2011 assessed the effect of stock exchange funding in the shari'ya compliant islamic economy of sudan. the banking system has a better potential than islamic financial instruments, such as the khartoum stock exchange, in facilitating developmental finance. a case study of the sudan telecommunications company showed that larger firms can cross-list elsewhere, but chose regional markets because of the lower costs of equity. however, larger firms were likely to favour block shareholders following the concept of islamic finance partnership (hearn, piesse, & strange, 2011). d'espallier and guérin in 2011 used a global data set of 350 mfis in 70 countries to study the common belief that women were generally better credit risks in microfinance than men. the study confirmed that a higher percentage of female clients in mfis associated with lower portfolio risk, fewer write-offs, and fewer provisions, but women and men borrowers were equal in other factors. interaction effects revealed that women, in general, were associated with enhanced repayment, but this trend was stronger for ngos, individual-based lenders, and regulated mfis (d'espallier, guérin, & mersland, 2011). moreover, bhuiyan and siwar in 2011 reported empirical evidence on the common findings from the existing literature on the performance of the islamic bank in microcredit and the poverty alleviation in bangladesh. their study examined the effect of the microcredit program of an islamic bank on the progress of poverty alleviation and socioeconomic development of its members. the study revealed that the borrowers reduced their vulnerability and poverty and improved their socioeconomic status after access to credit (bhuiyan, siwar, ismail, & talib, 2011). mirghani and mohammed in 2011 determined that poverty was the central problem to sustainable human development. islamic microfinance has been recognized as the best alternative to conventional microcredit, which promised the same benefits based on shariah. islam provides the complete code of life. thus, the religion covers poverty reduction as one of its premier agenda. islam considers that poverty induces other indecent acts, and thus, poverty should be treated with much care. their study revealed a scarcity of skilled individuals in islamic finance because of the lack of interest of academicians in the middle east in islamic finance. despite the prospects for microfinance, islamic financial systems faced specific challenges (mirghani, mohammed, bhuiyan, & siwar, 2011). by contrast, microfinance programs increasingly targeted poor women in developing countries with the expectation that access to microcredit advanced their empowerment while reducing poverty. variations in the socio-cultural, economic, and microfinance organizational contexts explained why some programs were more successful than others by comparing the results of two microfinance providers in ethiopia (haile, bock, & folmer, 2012). haque et al., asian finance & banking review 6(1) (2022), 33-41 38 development of conceptual framework as the current study notes, poor women are marginalized, lack chances for self-sufficiency, and depend on charity or welfare. without means to support themselves, poor women lose their self-confidence, and this disposition can lead to psychological, social, and mental problems. empowerment is the way to achieve basic opportunities for poor women. women can be empowered through encouraging and developing skills for self-sufficiency, which could result in eliminating the future needs for charity or welfare among individuals of the group. fiqure 1. conceptual framework conclusions as the main aim of the study was to investigate rigorous review of literature on the women empowerment and developed a conceptual framework of microfinance and women household, economic, and social empowerment of the microfinance borrowers in the world. the present study revealed that the poor women are marginalized, lack chances for self-sufficiency, and depend on charity or welfare. without means to support themselves, poor women lose their self-confidence, and this disposition can lead to psychological, social, and mental problems. the study also found that the women can be empowered through encouraging and developing skills for self-sufficiency. the study also revealed that the major problems facing the poor and the lower-income group was access to credit. their lack of assets for collateral and financial records, and limited credit history make obtaining credit from formal financial institutions almost impossible. the concluded that the microfinance can be a powerful and effective way of access to credit of the poor has been rapidly expanding in hopeless and helpless societies accordingly. the study also summarized that there are very limited studies justified with most relevant existing theories with the comprehensive review of literature and summarized literature gap, to justify with established knowledge which are already justified, criticized and accepted by the scholars in a particulars area. the study also has found very few study used different types of methodological tools that are used descriptive statistical, econometrics techniques as well as indexes to measure impact of microcredit on the poverty alleviation, livelihood improvement and socio-economic development of the mfis borrowers. the existing review also concluded that very few studies used cutting edge methodological tools in this area of research. finally, the present study developed a conceptual framework based above summary of findings to do a practical investigation to further examine the relationship between microfinance and women household, economic, and social empowerment of the microfinance borrowers in the world. author contributions: conceptualization, t.h.; methodology, n/a; software, n/a; validation, n/a; formal analysis, n/a; investigation, t.h., c.s. and a.b.b; resources, t.h., c.s. and a.b.b.; data curation, n/a; writing – original draft preparation, t.h., c.s. and a.b.b.; writing – review & editing, t.h., c.s. and a.b.b.; visualization, t.h., c.s. and a.b.b.; supervision, a.b.b.; project administration, a.b.b.; funding acquisition, t.h., c.s. and a.b.b. authors have read and agreed to the published version of the manuscript. institutional review board statement: statement: ethical review and approval were waived for this study because the research does not deal with vulnerable groups or sensitive issues. funding: the authors received no direct funding for this research. acknowledgments: not applicable. informed consent statement: informed consent was obtained from all subjects involved in the study. data availability statement: the data presented in this study are available on request from the corresponding author. the data are not publicly available due to restrictions. conflicts of interest: the authors declare no conflict of interest. references ahmed, f., siwar, c., & idris, n. a. h. 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(1999). assessing the poverty and vulnerability impact of micro-credit in bangladesh: a case study of brac. washington d.c, world bank. publisher’s note: cribfb stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2022 by the authors. licensee cribfb, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). asian finance & banking review (p-issn 2576-1161 e-issn 2576-1188) by cribfb is licensed under a creative commons attribution 4.0 international license. http://dx.doi.org/10.1016/j.jclepro.2012.08.043 http://dx.doi.org/10.1016/j.worlddev.2009.11.005 http://dx.doi.org/10.1016/j.lrp.2009.12.005 http://dx.doi.org/10.1016/j.jbusvent.2008.04.007 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ asian finance & banking review 9(1) (2025), 9-17 9 finance & banking review asfbr vol 9 no 1 (2025) p-issn 2576-1161 e-issn 2576-1188 journal homepage: https://www.cribfb.com/journal/index.php/asfbr published by asian finance & banking society, usa women at the table: assessing the effect of gender diversity on firm performance imtiaz chowdhury (a)1 (a) phd student, ivy college of business, iowa state university, usa, e-mail: imtiaz@iastate.edu a r t i c l e i n f o article history: received: 10th march 2024 reviewed & revised: 10th march 2025 to 20th october 2025 accepted: 20th october 2025 published: 24th october 2025 keywords: corporate governance, board diversity, firm performance, gender diversity, boardroom, bangladesh jel classification codes: g30, g34, j16, m14 peer-review model: external peer-review was done through double-blind method. a b s t r a c t this study aims to assess the relationship between female representation on corporate boards and firm financial performance in the context of bangladesh's emerging economy. while global research presents mixed findings on board gender diversity effects, empirical evidence from developing countries remains limited, particularly in south asian contexts where cultural and economic factors may influence governance-performance relationships differently than in developed markets. this study employs panel data collected from published annual reports of 74 companies listed on the dhaka stock exchange (dse) spanning the period from 2019 to 2022, utilizing both the www.dsebd.org database and individual company websites for data verification. panel data regression techniques including fixed effect models, random effect models, and panel corrected standard error (pcse) models examine gender diversity effects measured through proportion of women directors, binary presence variables, and blau heterogeneity index on firm performance proxied by return on assets (roa) and tobin's q ratios. the results reveal that female representation on board shows a significant negative relationship with roa and tobin’s q, with regression coefficients of -0.02 and -0.40 respectively, indicating deteriorating performance effects as women's board participation increases. large firms show insignificant relationship between gender diversity and performance metrics, while smaller firms demonstrate significant negative impacts when female family members comprise board positions. the findings of this study suggest that increased female representation in boardrooms may signal negative market perceptions to shareholders in bangladesh's developing economy context, particularly for smaller firms where family-based appointments are more prevalent. © 2025 by the authors. licensee asian finance & banking society, usa. this article is an openaccess article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). introduction corporate boards are pivotal for strategic decision-making and firm oversight; yet female representation on these bodies remains disproportionately low in many emerging economies, despite broader advances in gender equality. bangladesh, for instance, has achieved notable gains in narrowing gender gaps across education, politics, health, and economic participation over the past decade (see table 1), but women continue to occupy only 17.16 percent of board seats on average across publicly listed companies. this disparity is stark, given the mounting evidence that diverse boards can enhance organizational resilience, innovation, and stakeholder trust in developed markets (martínez‐garcía et al., 2021). however, empirical findings on board gender diversity and firm performance remain inconclusive due to methodological heterogeneity and underexplored contextual factors in south asian settings (singhania et al., 2022). in this circumstance, the scientific problem addressed in this study is whether female board representation influences firm financial performance in the specific institutional and cultural context of bangladesh. the purpose of this research is to investigate the relationship between gender diversity on corporate boards and firm performance, proxied by return on assets (roa) and tobin’s q, while controlling for firm size and industry effects. this study employs panel data regression techniques on 74 listed firms from 2019 to 2022, isolating the impact of three gender-diversity measures: the proportion of women on the board, the presence of women (a binary variable), and the blau index of gender heterogeneity. 1corresponding author: orcid id: 0009-0009-8480-6901 © 2025 by the authors. hosting by asian finance & banking society. peer review under responsibility of asian finance & banking society, usa. https://doi.org/10.46281/asfbr.v9i1.2674 to cite this article: chowdhury, i. (2025). women at the table: assessing the effect of gender diversity on firm performance. asian finance & banking review, 9(1), 9-17. https://doi.org/10.46281/asfbr.v9i1.2674 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://www.openaccess.nl/en https://doi.org/10.46281/asfbr.v9i1.2674 https://orcid.org/0009-0009-8480-6901 chowdhury, asian finance & banking review 9(1) (2025), 9-17 10 table 1. global gender gap index-bangladesh index name 2018 2025 rank score rank score global gender gap score 48 0.721 24 0.775 sub-index 1: economic participation and opportunity 133 0.441 141 0.457 sub-index 2: educational attainment 116 0.95 115 0.960 sub-index 3: health and survival 117 0.969 123 0.960 sub-index 4: political empowerment 5 0.526 3 0.721 rank out of 149 148 source: global gender gap report, world economic forum the aim of this research is to determine whether greater female representation on boards has a positive, negative, or neutral correlation with financial outcomes in an emerging economic context. briefly, chapter 2 reviews relevant literature and theoretical frameworks; chapter 3 formulates hypotheses; chapter 4 details data sources and empirical methodology; chapter 5 presents the regression and robustness findings; and chapter 6 concludes with implications for board governance research and directions for future study. literature review gender diversity in the boardroom gender diversity in boardrooms has gathered significant attention in recent years due to its potential implications for organizational effectiveness and governance dynamics. the proportion of women on boards has been widely studied as a key indicator of gender diversity. r. b. adams and ferreira (2009) and carter et al. (2003) demonstrated that higher levels of female representation on boards are linked to improved financial performance, better decision-making processes, and increased stakeholder value. the presence of women on boards was analyzed dichotomously by carter et al. (2010) to determine the influence on decision-making processes, inclusive discussions, and governance practices. campbell and mínguez-vera (2007) suggest that higher levels of gender heterogeneity, measured through the blau index, are associated with enhanced firm performance and innovation. blau index refers to a measure of group heterogeneity or diversity across a specific attribute, such as ethnicity, religion, or occupation (akram et al., 2020). blau index is computed as: blau index = 1 – ∑ 𝑝𝑖 2𝑛 𝑖=1 ............................... (1) where 𝑝𝑖 2 refers to the square of the proportion of n groups in the board. only two groups (i.e., male and female) are relevant for this study. the summation of all the squared proportions of relevant groups is subtracted from one to derive the blau index. firm performance firm performance is a central focus of corporate governance research and is often assessed through various financial indicators, including return on assets (roa) and tobin’s q. return on assets (roa) measures a firm’s profitability relative to its total assets, serving as a metric for operational efficiency and financial health. gompers et al. (2003) found positive associations between board gender diversity and roa and concluded that firms with higher levels of female representation tend to achieve better financial performance. tobin’s q assesses a firm’s market value relative to its book value. tobin’s q serves as a proxy for market valuation and investment efficiency. rose (2007) studied investors’ perceptions of corporate governance practices and long-term value creation, demonstrating that gender diversity on the board is associated with higher tobin’s q ratios. empirical studies and hypothesis development this section reviews empirical studies on board gender diversity and firm performance, and highlights the key findings, methodological variations, and gaps that motivated the current research. research on the proportion of women directors and firm performance yields mixed outcomes. erhardt et al. (2003) examined 127 u.s. firms using roa and roi measures for the period from 1993 to 1998 and found a positive association between financial performance and the proportion of female board members. similarly, lückerath-rovers (2011) analyzed 99 dutch companies using ols regression and reported superior performance in firms with a greater number of women on their boards. smith et al. (2006) studied 2,500 danish firms from 1993 to 2001 and observed positive effects of women directors on firm performance. in contrast, marinova et al. (2015) found no significant relationship between women proportion on the board and firms’ performance in scandinavian and other markets. studies on the binary presence of women directors also report divergent findings. munira (2020) examined 259 firms listed on the dse across 18 sectors and identified a positive association between women directors and roa. sobhan (2021) studied 20 nonbank financial institutions using ols regression and concluded that female directors significantly enhance roa. the blau heterogeneity index also provides insights into the effects of gender distribution on firm performance. dwyer et al. (2002) reported positive relationships between blau index values and firm outcomes. joecks et al. (2012) argue that performance benefits only emerge when a critical mass of 30 percent women is reached. on the other hand, darmadi (2010) investigated 354 indonesian firms using panel regression and found negative relationships between the blau index and roa and tobin’s q. chowdhury, asian finance & banking review 9(1) (2025), 9-17 11 contradictory findings across various contexts and methodologies, with differing sample sizes, cultural settings, and control variables, highlight unresolved issues in the literature. moreover, only a few studies integrate all three measures of gender diversity, such as proportion, presence, and heterogeneity, or focus on emerging economies or south asian contexts. thereby, the purpose of this study is to investigate the relationship between three measures of board gender diversity, covering the proportion of women directors, the presence of women directors, and the blau heterogeneity index, and firm performance measured by roa and tobin’s q in the context of an emerging economy. the following are the hypotheses of the study: h1: there is a positive relationship between the proportion of women in the boardroom and the firm’s performance. h2: there is a positive relationship between the presence of women on boardroom and the firm’s performance. h3: there is a positive relationship between the gender heterogeneity (blau index) and the firm’s performance. materials and methods sample data this study uses cross cross-sectional data set of 74 companies out of 319 listed companies in the dhaka stock exchange (dse) as a sample. industry-wise, the random sampling method is used to maintain the same proportion of companies in their corresponding sectors in the dhaka stock exchange (dse). the cross-sectional data set comprises data from selected companies from 2019 to 2022, accounting for the impact of the pandemic. due to inconsistent and insufficient data availability, 11 companies were excluded from the analysis. moreover, the insurance industry was excluded from this study to account for the riskier nature of the business and the inconsistent reporting practices of relevant variables, which differ from those of other companies. therefore, the final sample data comprise 296 firm-year observations, spanning 74 firms from 2019 to 2022. data related to roa, market value, book value, board members, participation of women on the board, and firm asset size are collected from the published annual reports of the respective firms available on their official websites. variables this study uses variables for the regression models, aligning with the empirical studies. roa and tobin’s q have been used as a proxy for a firm’s performance (adams et al., 2008). the percentage of women on the board reflects the proportion of female directors on the board. a dichotomous variable is used for understanding the presence of women on the board (dummy variable 1 means at least one female member on the board, and 0 represents no female member on the board), and the blau heterogeneity index is used as a proxy for gender heterogeneity on the board (darmadi, 2010). this study also incorporated some firm-specific control variables into the model, including firm size, board size, firm age, and the number of board meetings held. since these variables vary significantly from firm to firm, the natural logarithm is used to control for them. table 2. measurement of variables variables types of variables measurement scale roa dependent ebit/ total assets tobin’s q dependent market value of firm/book value of firm percentage of women independent no. of women/ no. of board members dummy variable independent 1 for at least one woman in board else 0 blau index independent gender heterogeneity index firm size control variable total assets of a firm board size control variable numbers of board members firm age control variable year of operation no. of board meetings independent no. of board meetings held methodology descriptive statistics are used to summarize the data set and assess the nature and characteristics of the variables. the pairwise correlation coefficient matrix is used to observe any possible relationships among the variables. this study employed the fixed effects (fe) model and the random effects (re) model to run the regression models (bell & jones, 2014). the pooled ols method is overlooked in this study, aligning with the results of the breusch-pagan lm test (breusch & pagan, 1980). the heteroskedasticity and autocorrelation problems have been dealt with by using the panel corrected standard errors (pcse) model to run the regression (zidi & hamdi, 2024). moreover, modified wald test and mle random-effect test are also conducted to determine group-wise heteroskedasticity for the fixed effect (fe) model and the random effect (re) model, respectively (baum, 2006). the serial autocorrelation and cross-sectional dependencies issues were tested by using the wooldridge test (drukker, 2003) and the pesaran test (pesaran, 2004), respectively. these issues were also resolved in the panel-corrected standard error (pcse) model by using robust standard errors. the random effect (re) model is found to be the appropriate model by the hausman test (baltagi et al., 2003). model specification the model can be theoretically specified as a panel data regression model, which explains the extent to which the performance of selected firms listed on the dhaka stock exchange is influenced by the representation of women on their boards. as we have chosen three proxies for gender diversity in the board members, along with some control variables thus our model will theoretically explain how and to what extent women proportion, women’s participation, and gender heterogeneity in the board members affect the firm’s performance, measured by roa, accounting-based performance, and tobin's q, market-based performance. the model can theoretically be written as: chowdhury, asian finance & banking review 9(1) (2025), 9-17 12 yit = αo+ β1itx1it+ β2itx2it+ β3itx3it+ β4itx4it+ β5itx5it+ cit+µit ……………………................................. (2) where, yit = measure of the firm’s performance αo = intercept coefficient β = coefficient of gender diversity and other control variables x = measures of gender diversity and other control variables i & t = ‘i’ denotes each firm and ‘t’ denotes year c = unit-specific error component µ = remaining error component since this study uses two measures for a firm’s performance, roa and tobin’s q, while three measures for a firm’s boardroom gender diversity, it sums up to six models, which can be rewritten as follows: roait = αo + β1itpercentageofwomenit + β2itlnbsizeit + β3itlnassetit + β4itlnageit + β5it noofboardmeetingit + cit + µit …………………………................................. (3) roait = αo + β1itdummyit + β2itlnbsizeit + β3itlnassetit + β4itlnageit + β5it noofboardmeetingit + cit + µit …………………………….................................. (4) roait = αo + β1it blau_indexit + β2itlnbsizeit + β3itlnassetit + β4itlnageit + β5it noofboardmeetingit + cit + µit …………………………….................................. (5) lntobinqit = αo + β1itpercentageofwomenit + β2itlnbsizeit + β3itlnassetit + β4itlnageit + β5it noofboardmeetingit + cit + µit ……………………………….............................. (6) lntobinqit = αo + β1itdummyit + β2itlnbsizeit + β3itlnassetit + β4itlnageit + β5it noofboardmeetingit + cit + µit …………………………….................................. (7) lntobinqit = αo + β1it blau_indexit + β2itlnbsizeit + β3itlnassetit + β4itlnageit + β5it noofboardmeetingit + cit + µit …………………………….................................. (8) where, roa is a measure of the firm’s accounting-based performance; lntobinq is natural log of the firm's market-based performance; αo is intercept coefficient; percentageofwomen is proportion of women on board; dummy is presence of women on board; blau_index is a measure of gender heterogeneity; lnbsize is natural log of the number of board members; lnasset is natural log of total asset of the firm; lnage is natural log of the firm’s age; noofboardmeeting is number of board meetings held yearly; cit is unit specific error component; µit is remaining error component. these six models were tested separately for the fe model, the re model, and the pcse method. results and discussions descriptive statistics table 3 provides a summary of the descriptive statistics for our selected variables, which show that, on average, roa is 3.76%, with an average number of board members being 8. some firms have board members as many as 21, while the minimum number of board members is 4. on average, 1 female member holds a position on the board, which shows that bangladesh has yet not become free from gender discrimination in the workplace. the average proportion of women on the board is 16%. while some firms have 13 females on their boards, some have no female representation on their boards of directors. firm total assets range from tk. 0.04 billion to tk. 998 billion, having a tobin’s q of 1.32 on average. the average age of the firms is 27 years, and firms hold an average of 11 meetings a year, both of which have a significant effect on the firm’s financial performance. table 3. descriptive analysis variable count mean stddev min max roa 296 0.038 0.052 -0.120 0.280 board size 296 8.568 3.606 4.000 21.000 no. of women 296 1.365 1.768 0.000 13.000 firm size (billion) 296 61.500 135.000 0.040 998.000 tobin’s q 296 1.329 1.270 0.183 7.706 firm age 296 27.081 13.208 5.000 64.000 percentage of women 296 0.160 0.162 0.000 0.632 dummy variable 296 0.652 0.477 0.000 1.000 blau index 296 0.217 0.186 0.000 0.500 no. of board meetings 295 11.620 8.180 4.000 58.000 source: published annual reports of 74 companies listed in the dhaka stock exchange (dse) chowdhury, asian finance & banking review 9(1) (2025), 9-17 13 correlation results table 4 shows the coefficient correlation matrix illustrating the relationships among all the variables used in this study. since this study is conducted on a panel dataset, the pairwise correlation coefficient matrix is used to determine the correlations among variables. it has been found that roa and tobin’s q are significantly positively correlated, indicating that accounting-based performance has a strong impact on a firm’s market-based performance. moreover, firm performance is significantly negatively related to lnasset, indicating that large firms incur higher costs, which in turn result in lower profitability. the proportion of women, the blau index, and the presence of women have positive correlations with each other because they all represent gender diversity on the board. the proportion of women has a significant negative relationship with lnasset, which indicates that smaller firms have a higher proportion of women on their boards. again, ln_bsize has a significant positive relationship with lnasset and noofboardm~g, which means that large firms have more members on their boards and large boards tend to hold frequent board meetings. vatcheva et al. (2016) suggest that multicollinearity exists when correlation coefficients exceed 0.80; however, from the correlation matrix, it is observed that none of the independent variables in the six corresponding models exceed this level. table 4. correlation coefficient matrix roa lntobbinq percenta~men dummy blau_index lnbsize lnasset lnage noofboardm~g roa 1 lntobbinq 0.45*** 1 percenta~men 0.0301 0.0442 1 dummy -0.0937 -0.0348 0.72*** 1 blau_index 0.0019 0.0403 0.95*** 0.85*** 1 lnbsize -0.1341 0.0214 -0.0186 0.1067 -0.0369 1 lnasset -0.24** -0.25** -0.23** -0.0666 -0.20* 0.59*** 1 lnage -0.0589 0.1086 0.1059 0.0572 0.0822 0.1935 0.131 1 noofboardm~g 0.0234 0.1121 -0.0545 -0.0608 -0.0799 0.32*** 0.51*** 0.0519 1 n.b. asterisk (*),(**), and (***) indicate significance at 10%, 5% and 1% level respectively regression analysis and discussion six regression models were run for each of the three panel data regression methods (fe, re, pcse). the dependent variables, roa and tobin’s q, were regressed on three different independent variables representing gender diversity and four control variables. the hausman test has been conducted to determine the appropriate model between fe and re (see table 5). it has been found that the random effect (re) model is appropriate for the regression of roa, and the fixed effect (fe) model is appropriate for the regression of tobin’s q on women’s representation on the board. to run a more robust and significant regression model, the panel corrected standard error (pcse) model was employed, which addressed the heteroskedasticity and autocorrelation issues in the model. table 5. hausman tests for fe vs. re and autocorrelation model name roa tobin’s q h1 h2 h3 h1 h2 h3 hausman test [chi²(5)] 4.04 4.40 4.03 24.52 24.08 24.51 (0.54) (0.49) (0.54) (0.00) (0.00) (0.00) wooldridge test (f-stat) 1.86 1.92 1.90 51.50 62.19 52.79 (0.18) (0.17) (0.17) (0.00) (0.00) (0.00) n.b. probabilities of chi2 and f-statistics are in parentheses table 6 and table 7 show that the f-statistic probability is less than the 5% significance level in all six models, indicating that all six models are statistically significant. the pcse regression results indicate that all three gender diversity measures have negative impacts on firm performance. specifically, the proportion of women on boards is significantly and negatively related to roa at the 5% level and to tobin’s q at the 1% level, leading to the rejection of h1. similarly, the presence of at least one female director exhibits a strong negative association with both performance metrics, roa and tobin’s q, at the 1% significance level, in contrast to the findings of nguyen et al. (2014), leading to the rejection of h2. finally, the blau heterogeneity index also shows significant negative relationships with roa (at the 1% level) and tobin’s q (at the 5% level), consistent with the work of he and huang (2011), which leads to the rejection of h3. these negative relationships across all three gender diversity measures suggest that, in bangladesh’s context, female representation on the board signals a lack of professional expertise among directors, especially when women directors are predominantly drawn from founding families or sponsors rather than appointed on merit (biswas et al., 2021). the scarcity of independent female directors, whose participation is shown elsewhere to enhance firm performance (ruigrok et al., 2006), further exacerbates these negative perceptions. control variables provide additional insights, with board size exhibiting no significant relation with roa but a positive relationship with tobin’s q at the 1% level, which suggests that investors prefer larger boards (darmadi, 2010). firm age has a negative impact on roa, yet a positive influence on tobin’s q at the 1% significance level, which provides evidence that established firms command greater market confidence despite lower accounting returns. the importance of frequent board engagement for strategic decision-making is justified as the number of board meetings correlates positively with both roa and tobin’s q at 1% significance. however, larger firms (lnasset) demonstrate significant negative chowdhury, asian finance & banking review 9(1) (2025), 9-17 14 performance effects. it highlights that indirect costs from asset growth may outweigh revenue gains, contrary to the findings of julizaerma and sori (2012). table 6. regression of roa on women’s representation in the boardroom independent variables fixed effect random effect pcse model 1 model 2 model 3 model 1 model 2 model 3 model 1 model 2 model 3 percentage of women -0.02 -0.02 -0.02 (-0.63) (-0.77) (-2.53)** dummy 0 -0.01 -0.01 (-0.54) (-1.04) (-3.96)*** blau_index -0.01 -0.01 -0.02 (-0.35) (-0.66) (-3.14)*** lnbsize -0.01 -0.01 -0.01 0.00 0.00 0.00 0.00 0.01 0.00 (-0.64) (-0.61) (-0.62) (0.02) (0.06) (0.01) (1.03) (1.79)* (0.99) lnasset -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 (-1.48) (-1.48) (-1.48) (-2.92)*** (-2.88)*** (-2.89)*** (-9.79)*** (-11.29)*** (-10.4)*** lnage -0.03 -0.03 -0.03 -0.01 -0.01 -0.01 0.00 0.00 0.00 (-1.30) (-1.31) (-1.33) (-0.85) (-0.87) (-0.88) (-1.08) (-1.07) (-1.07) no. of board meetings 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.09) (0.08) (0.08) (1.31) (1.27) (1.29) (6.81)*** (6.64)*** (6.76)*** no. of observations 295 295 295 295 295 295 295 295 295 r-square 0.05 0.05 0.05 0.08 0.09 0.08 0.09 0.10 0.09 f-statistics / wald chi² 1.83 1.81 1.78 12.83 13.38 12.67 2314.13 937.27 1778.64 wald test χ² (prob.) 0.00 0.00 0.00 0.00 0.00 0.00 pesaran’s test (prob.) 0.92 0.92 0.97 0.53 0.64 0.54 n.b. z values and t values are in parentheses, and asterisk (*),(**), and (***) indicate significance at 10%, 5% and 1% level respectively table 7. regression of tobin’s q on women’s representation in the boardroom independent variables fixed effect random effect pcse model 1 model 2 model 3 model 1 model 2 model 3 model 1 model 2 model 3 percentage of women -0.82 -0.62 -0.40 (-1.91)* (-1.96)** (-4.35)*** dummy -0.14 -0.13 -0.13 (-1.57) (-1.72) (-2.70)*** blau_index -0.50 -0.38 -0.22 (-1.62) (-1.54) (-2.18)** lnbsize -0.14 -0.11 -0.12 0.37 0.38 0.36 0.44 0.45 0.43 (-0.56) (-0.45) (-0.50) (2.23)** (2.27)** (2.19)** (6.76)*** (6.62)*** (6.58)*** lnasset -0.65 -0.65 -0.65 -0.23 -0.22 -0.23 -0.20 -0.20 -0.20 (-6.13)*** (-6.10)*** (-6.13)*** (-6.05)*** (-5.87)*** (-5.93)*** (-15.31)*** (-16.05)*** (-15.29)*** lnage 0.52 0.50 0.51 0.16 0.15 0.15 0.18 0.17 0.17 (1.56) (1.50) (1.54) (1.30) (1.16) (1.20) (3.45)*** (3.41)*** (3.33)*** no. of board meetings 0.01 0.01 0.01 0.02 0.02 0.02 0.03 0.03 0.03 (1.41) (1.38) (1.38) (3.60)*** (3.49)*** (3.53)*** (10.23)*** (9.94)*** (9.93)*** no. of observations 295 295 295 295 295 295 295 295 295 r-square 0.08 0.08 0.08 0.19 0.19 0.18 0.21 0.21 0.20 f-statistics / wald chi² 9.56 9.27 9.31 41.09 40.15 39.42 5599.30 6361.55 5714.81 wald test χ² (prob.) 0.00 0.00 0.00 0.00 0.00 0.00 pesaran’s test (prob.) 0.00 0.00 0.00 0.00 0.00 0.00 n.b. z values and t values are in parentheses, and asterisk (*),(**), and (***) indicate significance at 10%, 5% and 1% level respectively table 8 reveals that the negative impact of gender diversity is insignificant in large firms but significant at 10% and 5% levels in smaller firms (asset size < bdt 200 billion). since this study focuses primarily on smaller dse-listed firms, their pronounced negative outcomes drive the overall model. together, these results and their interpretations illustrate both empirical outcomes and theoretical implications, providing a comprehensive understanding of the effects of gender diversity on corporate performance in an emerging market setting. chowdhury, asian finance & banking review 9(1) (2025), 9-17 15 table 8. individual regression of small firms and large firms independent variables small firms large firms roa tobin's q roa tobin's q model 1 model 2 model 3 model 1 model 2 model 3 model 1 model 2 model 3 model 1 model 2 model 3 percenta~men -0.02 -0.60 -0.01 0.19 (-0.74) (-2.40)** (-1.51) -0.24 dummy -0.01 -0.16 -0.00 0.09 (-1.65)* (-1.86)* (-1.09) -0.50 blau_index -0.01 -0.36 -0.01 0.30 (-0.79) (-1.67)* (-1.43) -0.52 lnbsize 0.01 0.01 0.01 0.49 0.49 0.46 -0.01 -0.01 -0.01 0.08 0.08 0.12 -0.72 -0.94 -0.69 (3.80)*** (3.74)*** (3.60)*** (-2.03)** (-1.65)* (-1.96)** -0.27 -0.29 -0.40 lnasset -0.01 -0.01 -0.01 -0.23 -0.21 -0.22 0.00 0.00 0.00 0.05 0.07 0.03 (-3.35)*** (-3.52)*** (-3.38)*** (-7.91)*** (-7.71)*** (-7.67)*** -0.85 -0.38 -0.78 -0.19 -0.29 -0.12 lnage 0.00 0.00 0.00 0.26 0.23 0.24 -0.01 -0.01 -0.01 -0.15 -0.15 -0.10 -0.17 -0.11 -0.16 (3.30)*** (2.98)*** (3.11)*** (-2.94)*** (-2.73)*** (-2.88)*** (-0.48) (-0.6) (-0.31) noofboardm~g 0.00 0.00 0.00 0.04 0.03 0.03 0.00 0.00 0.00 0.01 0.01 0.01 (4.08)*** (3.84)*** (4.03)*** (5.65)*** (5.21)*** (5.44)*** (1.73)* -1.46 (1.71)* -0.56 -0.50 -0.39 no. of observations 261 261 261 261 261 261 34 34 34 34 34 34 r-square 0.08 0.09 0.08 0.24 0.24 0.24 0.40 0.38 0.39 0.03 0.04 0.04 f-statistics/wald chi² 4.60 5.07 4.61 16.45 15.86 15.69 3.72 3.38 3.65 0.18 0.22 0.23 n.b. z values and t values are in parentheses, and asterisk (*),(**), and (***) indicate significance at 10%, 5% and 1% level respectively conclusions the purpose of this study was to investigate the impact of gender diversity in corporate boardrooms on firm financial performance in bangladesh. panel regression results demonstrate that all three diversity measures (proportion of women directors, presence of women, and the blau heterogeneity index) are significantly negatively related to both roa and tobin’s q. the study indicates that increased female board representation corresponds with deteriorated firm performance in this emerging market context. this research makes a unique contribution to the literature by simultaneously analyzing multiple measures of gender diversity and controlling for firm size, board size, firm age, and meeting frequency within a developing-economy framework. it offers empirical evidence that, contrary to findings in many developed markets, gender diversity may signal shareholder concerns about director qualifications when women are predominantly appointed through familial or ownership ties rather than on merit. theoretical implications of this study underscore the importance of integrating cultural and governance factors when assessing the relationship between diversity and performance. managerially, firms and policymakers should consider merit-based board appointments, emphasizing professional expertise and independence over inheritance-based placements, to harness the potential benefits of board diversity. additionally, findings suggest that expanding board size and increasing meeting frequency might improve performance through broader deliberation and oversight. limitations of this study include its focus on a four-year period (2019–2022) and exclusion of other diversity dimensions, such as ethnic, educational, and experiential, due to scope constraints. the reliance on publicly reported annual data may also overlook qualitative aspects of director contributions. future research should extend the temporal scope and incorporate additional board composition variables, such as director independence, tenure, and educational background, to provide a more comprehensive portrait of the effects of diversity. comparative analyses across south asian markets and qualitative examinations of board nomination processes would further elucidate the contextual mechanisms driving the gender diversity and firm performance. author contributions: conceptualization, i.c.; methodology, i.c.; software, i.c.; validation, i.c.; formal analysis, i.c.; investigation, i.c.; resources, i.c.; data curation, i.c.; writing – original draft preparation, i.c.; writing – review & editing, i.c.; visualization, i.c.; supervision, i.c.; project administration, i.c.; funding acquisition, i.c. authors have read and agreed to the published version of the manuscript. institutional review board statement: ethical review and approval were waived for this study, as the research does not involve vulnerable groups or sensitive issues. funding: the authors received no direct funding for this research. acknowledgments: i would like to acknowledge sabnaz amin, associate professor at the university of dhaka, who provided advice and guidance throughout the research process. also, i would like to acknowledge md shikdarul moin, university of dhaka, for helping in data collection from annual reports. thanks to all for your unwavering support informed consent statement: informed consent was obtained from all subjects involved in the 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(2024). a panel-corrected standard error (pcse) framework to estimate capital structure and banking performance within the tunisian context. international journal of economics and financial issues, 14(2), 196–202. https://doi.org/10.32479/ijefi.15793 publisher’s note: asian finance & banking society stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2025 by the authors. licensee asian finance & banking society, usa. this article is an open-access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). asian finance & banking review (p-issn 2576-1161 e-issn 2576-1188) by asian finance & banking society is licensed under a creative commons attribution 4.0 international license. http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ asian finance & banking review 6(1) (2022), 16-24 16 finance & banking review asfbr vol 6 no 1 (2022) p-issn 2576-1161 e-issn 2576-1188 available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/asfbr published by cribfb, usa impact of covid-19 on the capital management (implementation and compliance of the basel-3 framework) of the banks in bangladesh k. b. m. rajibul hasan (a)1 gagan pareek (b) (a) agrani bank limited, dhaka, bangladesh; e-mail: rajibulhasan12@gmail.com (a) professor, techno india university, west bengal, india; e-mail: gpareek76@gmail.com a r t i c l e i n f o article history: received: 29th june 2022 accepted: 1st august 2022 online publication: 19th september 2022 keywords: capital management, capital adequacy ratio (car), bangladesh bank, npls-non performing loans covid-19 jel classification codes: d24, g32, g21 a b s t r a c t the global economic condition has faced tremendous pressure due to the arrival of covid-19. covid-19 has affected the business and financial system severely and put extra pressure on banks in earnings, expenses, and operating efficiencies. capital management has been a challenge for the banks in bangladesh due to higher npls ratio, poor governance, and weakness in the quality of assets. the covid situation has deepened manifold due to regulatory changes, fall in earnings, and asset quality with extra facilities being offered to the borrowers during the crisis period. this paper investigates the impact/s of covid-19 on capital requirements, capital adequacy ratio, and capital management of banks in bangladesh. the paper analyzes the effects of covid-19 on key risk factors of the banking sector i.e. capital requirements and financial stability. the study is based on time series data comprising 62 banks operating in bangladesh and a total of bank-year observations over the period 2012 to 2021. the empirical output of the paper unveils the degree of changes in capital adequacy of banks in the post-covid situation. the paper also illustrates the impact of covid-19 on car due to changes in performance indicators represented by different financial ratiosroa, nim & roe which have been affected negatively in the post-covid situation due to the effects of regulatory changes during the pandemic. although classification status was not changed due to regulatory relaxation, the expenses on provisions and others increased substantially and resulting in a fall in profits and affecting the car negatively. the findings also show that there exists interconnectivity between the performance indicators and capital management. © 2022 by the authors. licensee cribfb, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). introduction capital adequacy refers to the preservation of capital at adequate level by banks to offset the plausible financial losses due to emerged risks from credit, market and operations of banks. banks face various risk issues emerging from credit, market, interest rate, foreign exchange, operations etc. in day to day operations. these risks lead to losses for banks and threaten the profits, profitability and financial stability of banks. bank capital indicates the robustness and security of an individual bank. this will increase public confidence and also support the bank's future growth. capital creates the ability to serve customers well and protect the bank from future unexpected losses. capital is the most important issue for all banks (torbira & zaagha, 2016). financial performance is an indicator of a bank's financial health (torbira & zaagha, 2016). several previous studies have explained that capital adequacy ratios help measure the financial performance of firms in specific banks and banks in general. the capital adequacy ratio (car) shows the availability of required capital of banks to address the possible risk arising from the overall banking operations. car is important as it strengthen the financial health of banks and protects creditors and suppliers of funds from financials instability and probable distress. the greater value of car reflects stronger capability of banks in addressing the risk of loss. the (rubi et al., 2022) decline in car indicates the weakness of financial health and soundness of banks to face possible risks. according to hasan and zayed (2018) while working on the changes in basel-3 regime over basel-2 explained that operating efficiency by means of quality assets, diversification of assets, risk management etc. is the key to manage and minimize the required capital of banks; quality assets help to (mia et al., 2022) 1corresponding author: orcid id: 0000-0002-3142-9390 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/asfbr.v6i1.1798 to cite this article: hasan, k. b. m. r., & pareek, g. (2022). impact of covid-19 on the capital management (implementation and compliance of the basel-3 framework) of the banks in bangladesh. asian finance & banking review, 6(1), 16-24. https://doi.org/10.46281/asfbr.v6i1.1798 http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/asfbr.v6i1.1798 https://orcid.org/0000-0002-3142-9390 https://orcid.org/0000-0001-6237-329x hasan & pareek, asian finance & banking review 6(1) (2022), 16-24 17 reduce requirement of capital by controlling risky assets and improve capital level. for improvement of assets quality, banks must put emphasis on credit quality and selection of borrower having better rating grade as it indicates the degree of riskiness of the borrowers. better grade rating of the credit help banks to improve assets quality, minimize risky assets and improve capital position. banking regulations on capital requirements, known as basel iii has a major impact on the global financial system and economy. capital adequacy ratio (car) is the ratio of a bank's capital to risk-weighted assets and it is typically used to measure a bank's adequacy to support risky assets such as loans (bangladesh bank, 2014). the changes in business environment due to covid strike, fall of earnings of the borrowers and subsequently the regulatory changes in loan classification along with relaxation of credit repayment amid the covid-19 pandemic leads to significant changes in earnings and profitability of banks. due to the outbreak of covid-19, many risks is manifested in the financial sector and the economy. banks suffer from bad debt, poor governance, inefficiencies, and weak financial conditions, all of which have deteriorated during the pandemic. the number of bad debts in the banking industry has already been too high in recent years. the arrival of covid19 hit the overall business activities of the country and necessitates government to come up with financial assistance to the affected business to help them recover the losses. babu (2020) non-performing loans do not return to the record after leaving banks due to fall of monetary strengths of borrower. high bad debt ratios in banks reduce their lending capacity and increase shareholder risk. murtuza (2020a) opined that by mid-2020, the majority of banks fell in a perilous position in terms of making operating profits. the entire financial assistance (named stimulus package) has been facilitated by the banking sector. the central bank also designed policies and guidelines to provide the borrowers access to the incentives declared from government. but distribution of these financial supports to the existing loan defaulters is exacerbating the situation and tends to amplify the default rate and increase non-performing loans in the banking sector. for loans granted under stimulus packages, if the borrower fails to repay the loan banks will face the risk of default and substantial increase in npls. kumar et al. (2020) showed that non-performing loans are the most difficult and challenging issue for bangladesh's banking sector. murtuza (2020b) argued that non-performing loans are the main cause of bank shortages. barua and barua (2021) found that the larger the bank, the more the risk during the pandemic in the context of bangladesh. they did research on bangladesh's banking sector applying the stress-testing approach and found that all banks gets affected in managing risk-weighted assets, capital adequacy ratio and interest income due to the covid-19 pandemic. this paper attempts to reveal the impact of covid-19 on performance of banks measured by the financial indicators like roe, roa, nim, npls and car during the covid period and compare the result with the performance of those variables before the arrival of covid-19 pandemic. the result portrays nature, extent and severity of the changes in the variables during two period i.e. the pre-covid period and the post-covid period and also focuses on the key challenging areas that seems to be vulnerable for banks in terms of management of liquidity, profitability and asset quality especially during the crisis situation. the general aim of the study is to show the impact of covid-19 on basel implementation of bangladeshi banks. the following specific objectives have been identified to achieve the overall objectives:  identify the current challenges faced by bangladeshi banks in implementing basel iii.  provides some recommendations and strategic insights to overcome the current crisis and meet basel iii mandates for higher cash and liquidity standards. literature review the covid-19 pandemic could trigger a major economic recession causing unemployment problems which affects reduce savings and investment (world bank, 2020). as a result, this pandemic creates the risk of withdrawals of savings, rising default rates, slowing credit growth, low interest income and high risk of bankruptcy (world bank, 2020; goodell, 2020). moreover, it will be difficult for developing countries to recover quickly from the (ahmed et al., 2022) shock of covid19 due to weak institutional governance, underdeveloped capital markets, and bureaucratic issues in policy making (gorg et al., 2020; wilson, 2020). the banking sector is crucial and a significant factor for the country’s economic development. a number of regulatory frameworks have been developed and implemented by central banks to maintain financial sector stability. sound management of a country's accounts is said to be an indicator of its financial prosperity. mahmoud (2020) found that the banking sector is intertwined with the economy, and the (faisal-e-alam et al., 2022) superior strengths of these sectors rely not only on their own strategies, but also on the expansion of all other sectors in country. habib (2020) states that banks in bangladesh face a lot of uncertainty and skepticism regarding loan repayments by customers, especially when operations are disrupted. the capital position is being considered as the measure of financial strength and resilience of banking sector. failure of banks in maintain the minimum capital against the (zayed et al., 2021, 2022; chowdhury et al., 2021; rahman et al., 2021; kader et al., 2021) risky assets weaken the financial stability and strength of banks. covid-19 is over and relaxation given to borrowers amid the pandemic ends, if the repayment by the borrowers are not satisfactory, banks will be affected in its earnings, profitability, liquidity, npls management and thus the capital management. hasan (2020) found that nearly all banks experienced slow revenue growth, similar to last year. paul (2020) states that the banking sector faces liquidity and loan collection problems. hossain (2018) found that administrative softness, lack of good governance, and political desire are the (chowdhury et al., 2021; shahriar et al., 2021; ali et al., 2021; rahman et al., 2021) main factors behind dissatisfied banking. kumar et al. (2020) said the coronavirus is hampering the normal activities of bangladesh's hasan & pareek, asian finance & banking review 6(1) (2022), 16-24 18 agricultural economy. agricultural products become less valuable and cannot be sold. in the end, farmers faced heavy losses. in this case, pressure to repay the loan. in a study titled “covid-19 and risk involvement in the bangladesh banking sector: a study”, related to the covid-19 banking sector in bangladesh, authors have found the risk that covid-19 is having a myriad of impacts on bangladesh's economy and banking sector. at a critical time, bangladesh's banking sector is facing huge financial losses, rising non-performing loans, retail investments and declining operating profits. bank employees are severely impacted in their performance in their day-to-day operations (kumar, 2021; nahar et al., 2021; kader et al., 2021; kabir et al., 2021; zayed et al., 2021; shahriar et al., 2021). paul (2020) stated that bangladesh banking sector already suffering from high npls and it will increase due to this outbreak in the near future. bad debt takes two phases such as pre-covid npl and post-covid npl. during this situation bangladesh bank rules are necessary to initiate and speak reality. it is imperative to extract the very first relief policy against the possibility of collapse. banking sector faces liquidity problems matching deposits and loan recalls (iqbal et al., 2021; ali, et al., 2020). aldasoro et al. (2020) in the paper titled “effects of covid-19 on the banking sector: the market’s assessment” concluded that banks with good capitalization and high profitability will succeed and do things relatively well during the pandemic. korzeb and niedziółka (2020) in the paper based on the case of poland regarding “resistance of commercial banks to the crisis caused by the covid-19 pandemic” found that a bigger bank be more resilient to the negative effects of the pandemic while studying polish banking sector. in their study on the impacts of covid-19 on banks, it was shown that despite the economic threat from the pandemic, some writers have also garnered attention to digitalization of the banking sector, the formation of high-quality and dynamic market portfolios, calculating expected losses and assessing creditor quality (bryan et al., 2020; selvan & vivek, 2020; nayeen et al., 2020). barua and barua (2021) investigated the adverse effects of the covid-19 pandemic of bangladesh banking sector but they could not handle full/optimum portion of bank’s credit portfolio. they put emphasis on two big industries like sme sector and the rmg sector. however, the (chowdhury et al., 2020; kader, et al., 2020) pandemic has affected export industries, service sectors and manufacturing industry in bangladesh. because most banks' loan portfolios are diversified, therefore, the negative impact of the covid-19 pandemic will ultimately affect regular loans. types of profitability measures for a strong and representative banking are typically earnings from deployed assets measured by roa, earnings from interest after netting off the (chowdhury et al., 2020) interest expenses measured by nim, and return earned from the funds deployed by the owners i.e. the roe. a positive roa indicates that a bank can effectively use its assets to generate income. according to the hong kong institute of bankers, the higher the ratio, the more efficient banks are at using their assets productively. an roa above 1% is considered good performance. roa measures a company's overall effectiveness in generating profit from its available assets. the higher the company's return on assets, the better (gitman, 2012). wahyudi conducted research on islamic banks to determine the relationship between car, npf, fdr, bopo, and inflation and the profitability of banks, and statistical tests showed that car, fdr, npf, bopo, and inflation were united at the same time, and found that it impacts roa during the covid-19 pandemic. in their study while studying the impacts of covid on performance of islamic banks they concluded that a bank's efficiency is determined by a variety of bank-specific factors such as market capitalization and profitability, as well as macroeconomic factors such as gdp growth, inflation, real interest rates etc. capitalization has a direct impact on a bank's efficiency, as high or low capitalization is an important concern. capital adequacy ratios, asset quality, return on capital, and other solvency ratios have gradually gained importance during covid-19 (almonifi et al., 2021). the aim of the study by almonifi et al. (2021) is to examine the impact of covid-19 on the performance of saudi arabia's al rajhi bank as an islamic bank. they used several key metrics such as price-to-earnings ratio, return on invested capital, return on equity, earnings per share, capital adequacy ratio, liquidity ratio, and payout ratio to assess before and during this pandemic. five-year samples were drawn for comparison, and the cost-to-return ratio. their study found a small impact of this covid pandemic on performance. a growing body of literature highlights the potential impact of covid-19 for banks; however, much of this applies primarily to developed countries. (world economic forum, 2020; bis, 2020; stiller & zink, 2020). bangladesh's banking sector remains the main source of information of long-term finance and investment needed to foster faster growth in the country (mujeri & rahman, 2009). the country's banking system is already congested with high default rates and bad debts/ asset (bad debt) ratio putting bangladesh on the list of top bad debt countries asia-pacific situation (dey, 2019). the idea that banks need to hold sufficient buffers to cope up with recession. to make it effective, the basel committee has issued enhanced guidance capital adequacy ratio (basel-iii) agreement to improve the capacity of the banking sector to face the stressed scenario emerges from the unforeseen economic condition (bis, 2017). in particular, the lessons of major financial crises remain largely unknown in developing and emerging countries where banks are actively competing. in the in addition, many developing and/or emerging financial markets suffering from inefficiencies, inadequate regulatory infrastructure and lack of innovation and high-tech adoption, and morally compromised and dysfunctional adverse selection problems caused by political intervention (gorg et al., 2020; dominguez et al., 2010). the covid-19 pandemic is likely to change things significantly worse in these countries. for such emerging markets, this paper explores potential impact of pandemic on banking operations in bangladesh sector. methods and materials to evaluate and measure the impact of covid-19 on performance indicators and capital management of banks in bangladesh. the study is of analytical nature as it attempts to explore causes and effects among different variables. the quantitative hasan & pareek, asian finance & banking review 6(1) (2022), 16-24 19 method is used to measure the variables. the paper is an empirical type of study as it is mostly based on secondary data. secondary sources of data have been used in the study; the data are obtained from bangladesh bank annual reports for the period of 10 years (2012 to 2021). annual reports were collected from website of the bangladesh bank. research framework the study explains how the changes in different indicators during the covid pandemic period and the after, affects the capital adequacy ratio in the banking sector. the following flowchart shows the way in which the changes in different performance indicators like roa, roe, nim, npls, ei ratio etc. contribute and affect the car of banks. if increase positive impact on if decreases negative impact on if increases negative impact on if decreases positive impact on fiqure 1. research framework results impact of covid-19 on profitability of the various indicators that are used to determine profitability and earnings of banks, the most widely accepted ratios include nim, roe and roa. during the covid-19 period, return on assets (roa) at the end of 2019 and 2020 was 0.43%, and.30% much lower than the average roa in the previous years except of 2018 where the earnings get affected by higher rate of negative roa by the sbs and scbs. however, the roa showed an increasing trend by the end of first six month of 2021. during the covid-19 period, return on equity (roe) at the end of 2019 and 2020 was 6.83%, and 4.30% which shows a drastic fall of average roe than that in the previous years except of 2018 affected by higher rate of negative roe by the sbs and scbs. however, the roe showed an increasing trend in first half of 2021. table 1. earnings trend of banks roa -return on assets (%) roe-return on equity (%) pre covid-19 post covid-19 pre covid-19 post covid-19 bank types 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 ratio .64 .90 .64 .77 .68 .74 .25 .43 .30 .50 08.20 11.10 08.09 10.51 09.42 10.60 03.86 06.83 04.30 08.30 source: dos, bangladesh bank (bb annual report 2020-21) roa and roe of banks have decreased during covid-19 tenure. after-tax banking income decreased in 2020 compared to 2019. roa and roe of banks decreased in 2020 compared to 2019. table 2. banking sector net interest margin-nim (in %) bank types year 2012 year 2013 year 2014 year 2015 year 2016 year 2017 year 2018 year 2019 year 2020 year 2021 pre covid-19 post covid-19 nim 2.79 2.02 3.56 3.28 3.27 3.13 3.22 3.12 2.67 2.48 source: brpd, bangladesh bank (bb annual report 2020-21) the banking sector nim of the banking industry dropped to 2.67 percent in 2020 from 3.12 percent in 2019. nim of all banks was significantly high in the year 2014 (3.56 percent) and then exhibited a downward trend up to 2019 except an increase in 2018. table 3. ratio of npls to total loans in banking sector types of bank year 2012 year 2013 year 2014 year 2015 year 2016 year 2017 year 2018 year 2019 year 2020 june 2021 pre covid-19 period post covid-19 period scbs 23.9 19.8 22.2 21.5 25 26.5 30 23.9 20.9 20.6 sbs 26.8 26.8 32.8 23.2 26 23.4 19.5 15.1 13.3 11.4 interest income rises capital adequacy ratio (car) interest income rises interest income falls capital adequacy ratio (car) interest income falls capital adequacy ratio (car) capital adequacy ratio (car) roa roe nim ei ratio npls hasan & pareek, asian finance & banking review 6(1) (2022), 16-24 20 pcbs 4.6 4.5 4.9 4.9 4.6 4.9 5.5 5.8 4.7 5.4 fcbs 3.5 5.5 7.3 7.8 9.6 7 6.5 5.7 3.5 3.9 all banks 10 8.9 9.7 8.8 9.2 9.3 10.3 9.3 7.7 8.2 source: brpd, bangladesh bank (bb annual report 2020-21) non-performing loans ratio to loans show a mixed trend in the banking sector between 2012 and 2019. banks experienced a declining npl trend in 2020 but as of the end of june 2021, all types of banks had a slight increase in the amount of non-performing loans the non-performing loan ratio of the banks was 10% in 2012. after that, the non-performing loan ratio of rose till 2018 and in 2019, the non-performing loan ratio declined to 9.3%. the npls decreased in 2020 sharply due to change in prudential guidelines of bangladesh bank allowing relaxation in classification norms during the covid-19 period. as of the end of june 2021, it again increased to 8.2%. table 4. provision in banking sector (bdtin billion) types of bank year 2012 year 2013 year 2014 year 2015 year 2016 year 2017 year 2018 year 2019 year 2020 june 2021 pre covid-19 period post covid-19 period amount of npls 427.3 405.8 501.6 594.1 621.7 743 939.1 943.3 887.7 992.1 required provision 242.4 252.4 289.6 308.9 362.1 443 570.4 613.2 648 709.5 provision maintained 189.8 249.8 281.6 266.1 307.4 375.3 504.3 546.6 646.8 653.7 excess(+)/shortfall(-) -52.6 -2.6 -7.9 -42.8 -54.7 -67.7 -66.1 -66.6 -1.2 -55.8 provision maintenance ratio (%) 78.3 99 97.2 86.1 84.9 84.7 88.4 89.2 99.8 92.1 source: brpd, bangladesh bank (bb annual report 2020-21) increase of npls put pressure on banks in maintaining provisions as a cushion for the expected loss which reduces profits and thus the capital of the banks. table 5. expenditure to income ratio (in percentage) bank types 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 pre covid-19 post covid-19 scbs 73.2 84.1 84.1 84.5 90.2 81.3 80.5 84.9 83.2 87.1 sbs 91.2 94.8 99.5 113.9 137.8 124.0 144.6 159.8 158.1 176.3 pcbs 76.0 77.9 75.8 75.5 73.5 73.8 76.7 77.6 79.6 76.2 fcbs 49.6 50.4 46.8 47.0 45.7 46.6 47.5 48.8 46.2 44.9 total 74.0 77.8 76.1 76.3 76.6 74.7 76.6 78.0 79.2 80.2 source: dos, bangladesh bank (bb annual report 2020-21) the expenditure-to income ratio has increased for all types of banks in 2020 and 2021 than that of the previous years which is a clear indication of an increase in business expenditures and a fall of profits and earnings during the period. capital adequacy ratio (car) of banking sector capital adequacy put emphasis on overall capital position of banks and the protection of the suppliers of funds (depositors & creditors) from potential losses. capital adequacy is cushion to possible losses o f b a n k s arising from credit, market and operational risks that emerges in banks from day to day course of activities. according to basel-3 rules, all the banks operating in bangladesh have to keep the minimum amount of capital (known as the mcr required as per basel norms) which is currently “10.00 percent of the risk weighted assets (rwa) or bdt 4.0 billion as capital, whichever is higher”. table 6. car maintained by banks (in %) bank types 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 pre-covid-19 period post-covid-19 period scbs 8.1 10.8 8.3 6.4 5.9 7.00 10.3 5 9.6 6.8 sbs -7.8 -9.7 -17.3 -32 -33.7 -32.8 -31.7 -32 -32.9 -32.2 pcbs 11.4 12.6 12.5 12.4 12.4 12.2 12.8 13.6 13.7 13.3 fcbs 20.6 20.2 22.6 25.6 25.4 23.3 25.9 24.5 28.4 28.5 total 10.5 11.5 11.3 10.8 10.8 10.8 12.1 11.6 12.5 11.6 source: brpd, bangladesh bank (bb annual report 2020-21) it is observed that the car of the banking sector increased in 2021, but decreased in 2021 which shows the impact of regulatory relaxation in classification which improved the assets quality for shorter period and increased the car during the period. the results shows a sharp decline in the car in post pandemic situation. car decline resulted due to lower profits earned by banks from lending and overall businesses because of change in regulatory guidelines on classification, liquidity and interest charge by bangladesh bank. the decline in car indicates the weakness of financial health and soundness of banks to face possible risks. table 7. summary of the impacts of the independent variables on the car the dependent variables pre covid post covid post covid 2019 2020 change direction 2021 change direction earnings ratio roa 0.43 0.30 decreased 0.50 increased roe 6.83 4.30 decreased 8.30 increased nim 3.12 2.67 decreased 2.48 decreased assets quality hasan & pareek, asian finance & banking review 6(1) (2022), 16-24 21 npls 9.30 7.70 decreased 8.20 increased operating expenses provision 89.20 99.80 increased 92.10 decreased ei 78.00 79.20 increased 80.20 increased car 11.6 12.5 increased 11.60 decreased source: self-developed discussion roa & roe have been affected negatively in the post covid situation due to adverse effects of pandemic which caused downturn in business and economic activities; as a result the assets deployed by banks by giving credit to the borrowers failed to generate the desired earnings in the form of interest as the payment from borrowers was irregular due to regulatory relaxation in credit management during the pandemic. regulatory changes in loan classification along with the moratorium period (the grace period to charge interest in a loan account) facilities affected the earnings, profitability and liquidity position of banks; delay in repayment and static status of loans even after nonpayment lead to a drastic fall in interest earnings and bubbled the assets quality for a particular time period; irregular repayment, regulatory forbearances and regulatory instruction regarding accounting treatment caused the interest income to fall significantly; but the regular payment to the creditors of banks had to be made on time just like the earlier times; as a result decreasing interest income with an increasing or at least prevailing interest expenses resulted in a negative change in net interest margin; due to relaxation in loan classification during the pandemic and disbursement of new/fresh loans under government stimulus packages showed a temporary improvement in the npls scenario; in one way classification status remained unchanged during the tenure and the new loans increased the total amount of npls which brought the npls ratio down in 2020 as an effect of pandemic; although classification status was not changed due to regulatory relaxation, the banks needed to maintain the provisions against the npls as per the existing rules; thus decrease in npls did not show significant improvement in provisioning requirement of banks; as interest expenses, and operating expenses are quite fixed in nature and needs settlement on due time but interest income decreased significantly during the pandemic, the expenses of banks thus showed an upward shift; as car is dependent on the earnings (as measured by roa, roe, nim etc.) for capital supply, liquidity as well as efficiency (measured by ei ratio) and quality of assets for managing requirement of capital (indicated by npls), banks could manage to maintain the ratio in 2020 just after the pandemic is over; but later on banks faced the challenges in maintain in car in 2021 where change in assets quality with an increase in car ( due to the end of facility tenure given from regulators in terms of repayment, interest charge and classification norms. conclusions as the pandemic facilitated the borrowers and restricted the activities of banks in earnings, profitability, liquidity, npl management and overall banking performances, it is now responsibility of both the regulator and the banks to adjust the changing situation in such a way that ensure protection of interests of both banks and the customers with maximum benefits. under the circumstances, following are the suggestions that can be made here based on the findings of the study which can help the policy makers and regulatory authorities in making the right choices in future.  regulatory relaxation as given to the borrowers should not be extended further; because banks will not be able to bear the expected losses in earnings and profitability for a long time;  it is crucial for banks to monitor the loans given under stimulus packages; because default of these loans will affect the earnings as well as the asset quality i.e. the npls scenario of banks;  bangladesh bank can allow a time-bound facilities to the banks for a particular time to transfer the earned interest in income account, preserving provisioning against the npls and maintaining car with ccb;  banks should follow the austerity policy and control the unnecessary expenses to bring the ei ratio at least to a reasonable level;  if banks can make adequate profits in a year they should try to retain the profits in the form of capital to strengthen the capital position and ensure long term financial soundness. the global economy has been affected by the covid-19 pandemic and resulted in slowdown of business activity and brought economic downturn. already bangladesh's banking industry is entangled with huge nonperforming loans, poor corporate governance, capital shortfalls etc. amidst all this, the covid-19 pandemic added new challenges to the banking industry and put extra pressure for ensuring effective capital management after the covid-19 situation to comply the requirement of adequate capital under basel-3 regulation. the prevalence of bad debt, covid-19 pressure, a culture of political interference in sanctioning loans are responsible for banks' net losses. central banks should pressure banks to step up efforts to collect bad debts and force them to act internally to strictly manage and comply. in this context, to recover from covid-19 and implement basel iii, banks will have to restructure if they want to survive in the new environment through better risk management and measurement by banks. author contributions: conceptualization, k.b.m.r.h.; methodology, k.b.m.r.h.; software, k.b.m.r.h.; validation, k.b.m.r.h. and g.p.; formal analysis, k.b.m.r.h.; investigation, k.b.m.r.h.; resources, k.b.m.r.h.; data curation, k.b.m.r.h.; writing – original draft preparation, k.b.m.r.h.; writing – review & editing, k.b.m.r.h. and g.p.; visualization, k.b.m.r.h.; supervision, g.p.; project administration, g.p.; funding acquisition, k.b.m.r.h. and g.p. authors have read and agreed to the published version of the manuscript. hasan & pareek, asian finance & banking review 6(1) (2022), 16-24 22 institutional review board statement: ethical review and approval were waived for this study, due to that the research does not deal with vulnerable groups or sensitive issues. funding: the authors received no direct 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e-mail: y.mori@tcue.ac.jp (b) professor, faculty of economics, kushiro public university of economics, hokkaido, japan; e-mail: ozaki@kushiro-pu.ac.jp (c) professor, college of economics, ritsumeikan university, shiga, japan; e-mail: harimaya@fc.ritsumei.ac.jp a r t i c l e i n f o article history: received: 4th march 2024 reviewed & revised: 5th march to 11th june 2024 accepted: 12th june 2024 published: 16th june 2024 keywords: customer satisfaction, ordered probit analysis, financial literacy, security investment, financial services marketing, retail banking. jel classification codes: g2, g20, g21 peer-review model: external peer-review was done through double-blind method. a b s t r a c t as a consumer-oriented service industry, the quality of customer service provided by banks and their customers' overall satisfaction with their services are becoming increasingly important. this study examines the factors influencing customer satisfaction with banking services provided by japanese regional banks. using data from the japan financial institution customer ratings meter® of about 200,000 cases, we estimated the factors affecting customer satisfaction using an ordered probit model. the results indicate a positive correlation between direct financial services from regional banks and customer satisfaction. this relationship is solid when customers hold investment-related products. additionally, we observed that individual customer satisfaction tends to decline with increasing financial asset holdings and increase as customers become more financially literate. furthermore, we noticed that customer satisfaction tends to be higher for females than males, younger people than the elderly, and occupied customers than for unoccupied customers. the findings of this study suggest that customers may be more attracted to regional banks that provide investment information and advice tailored to their circumstances. it may be beneficial for regional banks to understand better factors that influence customer satisfaction, such as the age and gender of their customers, their level of financial literacy, and the amount of financial assets they have. it would be beneficial for regional banks to consider these factors and enhance the quality of their direct interactions with customers and the customer service provided by their staff and call centers. this could help regional banks build long-term, ongoing relationships with their customers. © 2024 by the authors. licensee asian finance & banking society, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). introduction the past two decades have witnessed a profound transformation within the banking industry, with global and regional shifts occurring concurrently. the banking industry must continually adapt to mounting competition from non-banking financial institutions, shifting demographics and social trends, the advent of information technology, such as digital banking, fintech, and robot advisors, evolving channel strategies, and new entrants into the banking industry. the banking industry has experienced significant disruption from non-banking industries due to government deregulation of the financial services sector, changing customer preferences and needs, and regulatory changes (annin et al., 2014; byers & lederer, 2001). the expansion of financial product delivery channels has prompted banks to adopt a more assertive approach to marketing new and more sophisticated financial products, including investment trusts and mutual funds. this expansion has led to an increase in the number of individual investors who are actively engaged in investing in investment trusts and mutual funds. in japan, it has become common practice for inexperienced individual investors to commence their participation in the securities market by investing in investment trusts. furthermore, the continued aging of the population has invested in investment trusts, a more popular choice among older people, who have accumulated more assets than the younger generation to fund their retirement. in addition, the japanese government has implemented policies to expand the nippon individual saving account (nisa) and defined contribution pension plans, which have led to a greater prevalence of investment in investment trusts by individuals. the entry of individual investors into the securities market through investment trust or mutual fund investments has also been observed in emerging asian countries such as malaysia, where 1corresponding author: orcid id: 000-0003-2034-2262 © 2024 by the authors. hosting by asian finance & banking society. peer review under responsibility of asian finance & banking society, usa. https://doi.org/10.46281/asfbr.v8i1.2216 to cite this article: mori, y., ozaki, y., & harimaya, k. (2024). determinants of customer satisfaction in retail banking: empirical evidence from japanese bank customers. asian finance & banking review, 8(1), 1-12. https://doi.org/10.46281/asfbr.v8i1.2216 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://www.openaccess.nl/en https://doi.org/10.46281/asfbr.v8i1.2216 https://orcid.org/0000-0003-2034-2262 https://orcid.org/0000-0001-5973-2503 https://orcid.org/0000-0001-5354-4907 mori et al., asian finance & banking review 8(1) (2024), 1-12 2 mutual fund investments by individual investors are becoming increasingly prevalent (mahdzan et al., 2020; ripain & ahmad, 2018). comprehensive financial services, including investment advice and financial planning, have become crucial to banks' retail business. moreover, the perspective from which individual customers evaluate financial institutions is transforming. in addition to traditional evaluation items such as accuracy and speed, the quality of financial services, including customer support and counseling, and customer satisfaction with these services are becoming increasingly important (ananda & devesh, 2018). it has been proposed that enhancing customer satisfaction also influences bank profitability (anderson et al., 1994; nagar & rajan, 2005), and improving customer satisfaction has emerged as a pivotal strategic objective for bank management. a substantial body of research has been conducted on evaluating banks' retail services and customer satisfaction with their clients, including an analysis of e-banking (ananda et al., 2023; cambrafierro et al., 2017; egala et al., 2021; kaur et al., 2021; pakurár et al., 2019). nevertheless, to date, no study has been conducted on customer satisfaction among users of banking services, focusing on their investment advice rather than on a specific bank. instead, we conducted a study on users' data of many banks. this study examines the factors that influence customer satisfaction among japanese regional banks. japanese regional banks maintain a dense branch network within the prefecture of their head office, including urban and regional areas. they provide services that are closely linked to individual customers. concentrating on regional banks was preferable to comprehend the patterns of customers utilizing financial services in japan as a whole, including in the regions, and to evaluate the quality and quantity of financial services. this study examines the factors influencing customer satisfaction with banking services, focusing on the influence of information channels and the content of investment advice. the analysis will consider several socio-demographic factors, including the client's age group, gender, asset level, and financial literacy. in this study, we employed the japan financial institution customer ratings meter®, a distinctive and expansive database that has not been extensively utilized to date, to investigate the factors influencing customer satisfaction, focusing on socio-demographic variables. we employed an ordered probit model to analyze the data. the remainder of this paper is organized as follows: the subsequent section reviews the pertinent literature and develops the hypotheses. section 3 presents the data and methodology employed in this analysis. section 4 presents the estimated model's findings, while section 5 discusses the results. finally, section 6 contains concluding remarks. literature review effect of advice on customer satisfaction several studies have demonstrated that individual customers of financial institutions are influenced by the investment advice and information provided by financial institutions in the execution of their customers' financial transactions and the amount of their investments. kramer (2012) revealed that financial advisors assisted clients in diversifying their portfolios, reducing volatility, and decreasing the turnover ratio. another study also showed a positive impact on investment performance, particularly when investors place trust in their investment advisors (monti et al., 2014). bhattacharya et al. (2012) examined individual investors in germany. they found that the advice was received by wealthier male investors who had a more extended history with their brokers and that the advice improved efficiency. conversely, other studies indicated that investors needing more financial literacy should seek investment advisors, which does not necessarily imply that they receive advice. mullainathan et al. (2012) also proposed that financial advisors may have a conflict of interest. while financial advisors may encourage individual investors to pursue financial returns more strongly, they also strongly recommend active funds that could earn higher fees for investors. previous studies have indicated that investment advice provided by financial advisors may only sometimes benefit investors. however, it may facilitate risk-taking, enhance performance, and enhance customer satisfaction. h1: there is a positive correlation between banks' information or advice and customer satisfaction with banking services. effect of service quality on customer satisfaction another factor that affects customer satisfaction with banks is the quality of banking services. many empirical studies have employed multivariate analysis techniques, such as servqual or path analysis, frequently utilized in previous marketing research, to investigate the relationship between banking services and customer satisfaction within the banking industry. these studies have consistently demonstrated that enhancing the quality of banking services can positively impact customer satisfaction and have a favorable impact on bank profitability (boonlertvanich, 2019; halim et al., 2023; johnston, 1997; oppewal & vriens, 2000; paul et al., 2016; teeroovengadum, 2022; varki & colgate, 2001). uddin (2020) demonstrated that the quality of banking services, including exemplary atm service, mobile banking, and call center quality, is paramount in fostering customer loyalty and enhancing customer satisfaction. the superiority of conventional or regular financial advising methods may be more advantageous than e-banking for older clients who have more assets but are aware that they could be more financially literate and are cautious about managing their investments. furthermore, it has been demonstrated that the quality of service provided by financial planners or advisors regarding advice, including ease of contact, reliability, and empathy, also affects customer satisfaction (gazi et al., 2021; jamal & naser, 2002). financial services that prioritize communication with individual customers and aim to resolve their issues enhance customer satisfaction. carsamer (2018) also examined the factors influencing customers' perceptions of ghana's financial products and banking services. the study found that the frequency and regularity of visits by bank employees positively influenced customers' perceptions of the bank's services. the results indicate that the quality of service to customers, mainly how they are approached, and the human mori et al., asian finance & banking review 8(1) (2024), 1-12 3 contact that enhances the quality of service are significant factors contributing to satisfaction with bank services. in light of the preceding discussion, this study proposes the following hypothesis: h2: how customers are approached affects their satisfaction with banking services. h3: a direct customer approach by salespeople is associated with greater customer satisfaction with banking services. effect of socio-demographic factors on customer satisfaction recent studies have demonstrated that socio-demographic factors significantly influence customer satisfaction with financial services (chattha, 2019; darko et al., 2017; gan et al., 2011; seiler et al., 2013; widityani et al., 2020). in a study of new zealand electric banking (eb) users, gan et al. (2006) considered socio-demographic factors. they found that individuals with higher incomes were less likely to use eb. in their 2014 study, okeke and okpala employed a binomial and multi-item logit model to analyze the impact of socio-demographic factors on nigerian customers' use of eb. their findings indicated that socio-demographic characteristics such as male gender, college graduation, student status, office work, and unmarried status were significant. li et al. (2005) employed a multinomial probit model to investigate the factors influencing customers' demand for a range of financial products and the ordering patterns of these products. the findings indicated that female and older individuals exhibited a heightened sensitivity to their overall satisfaction with the banking institution, relative to male and younger individuals, regarding the decision to purchase supplementary financial products. furthermore, socio-demographic factors influence how banks and financial products are perceived. in a study by carsamer (2018), the factors affecting customer perceptions of financial products and banking services in ghana. the results indicated that socio-demographic characteristics, such as age, marital status, and income, contribute to increased awareness of available services. based on this discussion, this study assumes the following hypothesis. h4: socio-demographic factors significantly influence customer satisfaction with banking services. effect of financial literacy on customer satisfaction a lack of financial literacy among individual investors is a pervasive issue affecting many global investors (lusardi & mitchell, 2011). over the past few decades, many studies have been conducted on the effects of client financial literacy and investment advice on investment decisions. in particular, many researchers have studied to assess the impact of financial and investment literacy on judgments about a range of financial products and services, including stock investments, mutual fund investments, retirement planning, and mortgage financing. (fornero & monticone, 2011; gerardi et al., 2010; mahdzan et al., 2020; müller & weber, 2010; van rooij et al., 2011). nevertheless, the evidence regarding the significance of financial literacy in these financial decisions is inconclusive. some studies have indicated a significant positive correlation between financial literacy and financial decision-making, whereas others have demonstrated a relatively weak relationship. in their research, jamal and naser (2002) showed that customer expertise plays a role in influencing customer satisfaction in the context of retail banking. in particular, a negative correlation exists between customer expertise and satisfaction, indicating that customers with expertise tend to be less satisfied. financial literacy has been demonstrated to be associated with investment decision-making, specifically the selection of financial products and stock investments. in their study, van rooij et al. (2011) utilized data from dutch households to investigate the relationship between financial literacy and investment decisions. their findings indicated that individuals with excellent financial knowledge were likelier to invest in stocks, whereas those with limited financial literacy were less inclined. conversely, the satisfaction derived from financial advice financial institutions provide is contingent upon the clients' financial literacy level. kramer (2016) posited that financially literate clients are less likely to seek financial advice, and additionally, this relationship is more pronounced in households with more significant assets. conversely, calcagno and monticone (2015) discovered that individuals with superior financial literacy were more prone to utilize investment advisors. moreover, calcagno and monticone (2015) discovered that individuals with elevated financial literacy were more prone to use investment advisors. vlašić et al. (2022) also found that individuals with low financial literacy, compared to those with high financial literacy, were more likely to rely on subjective cues (e.g., customer feedback) in generating cognitive loyalty when recommending financial products to others. this study indicates that individuals with limited financial literacy are prone to making decisions that may not be entirely rational. as previously discussed, financial literacy affects the investment behavior of retail customers of financial institutions because it affects individuals' asset choices. furthermore, the presence of investment advice by financial institutions can have a complex impact on their decisions and customers' satisfaction with their financial institutions. in light of the preceding discussion, this study predicts the following hypothesis: h5: customers' financial literacy level significantly influences customer satisfaction with banking services. materials and methods in this research, a quantitative analysis is performed using the results of a questionnaire survey that includes the satisfaction levels of customers of japanese regional banks. the survey results utilized in this study were derived from the 2019 and 2020 editions of the japan financial institution customer ratings meter®, a database of the results of an online questionnaire survey on the evaluation of financial institutions conducted every august among japanese adult aged 20 and over, with approximately 170,000 responses received in each year. nikkei research inc. provides the meter®. the japan financial institution customer ratings meter® is a database of the results of an online questionnaire survey on the mori et al., asian finance & banking review 8(1) (2024), 1-12 4 evaluation of financial institutions conducted every august among the general population of individuals aged 20 and over nationwide. each year, the meter® receives approximately 170,000 responses. the individual questionnaire results are available for 46 regional banks and 12 second-tier regional banks in the 2019 data set and 45 regional banks and 12 secondtier regional banks in the 2020 data set, with one fewer regional bank. for this paper, the term "regional banks" encompasses the banks above and saitama resona bank. those who utilized these banks were included in the analysis. the questionnaire comprises 30 questions designed to elicit information on various socio-demographic factors for each respondent. the questionnaire includes questions regarding the respondents' gender, age, area of residence, occupation, the number of financial assets held, and customer characteristics such as savings and investment style and financial literacy. the questionnaire includes questions about the respondent's relationship with the financial institution. these include the points of contact between the respondent and each financial institution, the services provided at the financial institution, and the overall satisfaction level of the financial institution used. the 30 questions in this paper address various topics, including gender, age, occupation, financial assets, products and services currently utilized by financial institutions, contact with financial institutions within the past year, overall satisfaction with the financial institutions used, and financial literacy. for reference, these questions are presented in table 1. the sample size for 2019 was 10,890, while that for 2020 was 10,601. table 1. customer satisfaction factors variables definition personal attributes and bank competition gender age female=0; male=1 the class value for each age group is divided into 13 classes, from age 20 to 79 and 80 and above in 5-year age increments. each age group value (e.g., 22 for ages 20 to 24) occupation 0 for retirees, unemployed persons, and others without regular employment and 1 for those with other regular jobs. assets logarithmic value of total financial assets expressed as the median for the class (e.g., 2 million yen for 1 to 3 million yen, etc.) literacy financial literacy; the overall score for the 10 questions was calculated for each individual, with +2 for correct answers, -2 hhi herfindahl-hirschman index: calculated from the share of total deposits by financial institution and business type by prefecture. shr deposits market share: calculated from total deposits by financial institution and business category by prefecture. contacts viewed in the past year staff salespeople visits, phone calls, in-store callcenter call center website website, smartphone apps, homepage events customer events and seminars organized by the bank sns social networking sites, i.e. facebook, line, twitter etc. pop-up online video commercials and pop-up ads trainads train ads, dm flyers, brochures, and other ads none none products and services currently used; deposit deposits and settlements related (ordinary and fixed deposits, foreign currency deposits, fixed term and fixed amount savings (by japan post bank), debit cards) hloan housing loan investment investment (stock trading, japanese government bond for individuals, mutual funds and etfs, foreign currency mmfs, reit, wrap accounts and fund wrap accounts, robo advisor) insurance insurance and private pensions related (medical care insurance, yen and foreign currency savings insurance, ideco (individual-type defined contribution pension plan) fixed and variable individual annuities) in the banking industry, it has been observed that banks operating in competitive environments strive to establish sustainable competitive advantages through enhanced service quality and customer relationships (petridou et al., 2007). consequently, a variable indicates the degree of competition in the retail business of each regional bank. the herfindahlhirschman index (hhi) is calculated from the deposit share in each prefecture where the head office of each regional bank is located. this index is employed as a measure of the degree of competition in that prefecture. additionally, the inprefecture deposit share (shr) is used as a control variable, which indicates the name recognition and influence of the relevant regional bank on its customers. the number of samples was 75,690 in 2019 and 2020, including data other than meter. in addition to servqual, there are different methods of analyzing customer satisfaction, such as the national customer satisfaction index (ncsi) or nonlinear regression models that estimate customer satisfaction factors (arbore & busacca, 2009). in recent years, numerous analyses, including ordinal logit and ordinal probit regression models, have been employed (ngo, 2015; moraru et al., 2022). in this analysis, we used ordered probit regression models, utilized in numerous previous studies in recent years. results and discussions descriptive results table 2 depicts that most respondents (59.9%) are between the ages of 40 and 59, with a slight majority of males (55.3%). additionally, most respondents (55.3%) have regular jobs, which may include homemakers/househusbands or older, nonretired persons. the respondents' mean and median financial assets were 18.71 million and 4.5 million, respectively. those who scored 0 or more correct answers exhibited a financial literacy level exceeding 60%. 48% of respondents indicated that they had contacted a financial institution in some form, with 24.3% stating that they had done so through direct contact with staff and 13.1% via the institution's website. mori et al., asian finance & banking review 8(1) (2024), 1-12 5 table 2. descriptive statistics (n=215,010) variables frequency percentage variables frequency percentage gender occupation male 128,725 59.9 yes 118,899 55.3 female 86,285 40.1 no 96,111 44.7 age literacy ~29 18,644 8.7 below -1 24,753 11.5 30~39 33,646 15.6 0 57,704 26.8 40~49 48,447 22.5 1－10 100,812 46.9 50 ~59 52,982 24.6 11－20 31,741 14.8 60 ~69 41,835 19.5 70 ~79 17,698 8.2 80 and above 1,758 0.8 financial assets (million yen) contacts viewed in the past year ~ 300 56,193 26.1 staff 56,429 24.3 300~ 1,000 46,768 21.8 callcenter 3,566 1.5 1,000~ 3,000 28,089 13.1 website 30,474 13.1 3,000~ 5,000 9,403 4.4 events 1,602 0.7 5,000~10,000 6,908 3.2 sns 2,536 1.1 10,000~50,000 2,810 1.3 pop-up 10,936 4.7 50,000 and above 792 0.4 trainads 6,142 2.6 no answer 64,047 29.8 none 121,004 52.0 the results for the entire sample table 3 presents the probability distribution of customer satisfaction with regional banks in 2019 and 2020. consequently, the highest probability of customer satisfaction in 2019 (2020) was 0.504 (0.496) for the category "neutral," followed by 0.352 (0.362) for the category "satisfied." the ranking was identical in both years. the proportion of respondents who rated their satisfaction as "very satisfied," "dissatisfied," and "very dissatisfied" was 0.078 (0.079), 0.048 (0.045), and 0.018 (0.017), respectively, in 2019 (2020). these values were all shallow and exhibited minimal variation between the two years. the total probability of customer satisfaction (highly satisfied and satisfied) was 0.430 (0.441) in 2019 (2020), while the total likelihood of dissatisfaction (highly unsatisfied and unsatisfied) was 0.066 (0.062) in both years. satisfaction was significantly higher than dissatisfaction. nevertheless, given that the total satisfaction probability is below neutral, regional banks should analyze the reasons behind the high number of customers who responded neutrally. this analysis should inform the development of marketing and management strategies designed to increase the satisfaction of these customers. table 3. probability distribution of the level of satisfaction 2019 2020 2019 & 2020 category / particulars observations probability observations probability observations probability p(y=1) highly dissatisfied 1,983 0.018 1,807 0.017 3,790 0.018 p(y=2) dissatisfied 5,268 0.048 4,805 0.045 10,073 0.047 p(y=3) neutral 54,849 0.504 52,655 0.496 107,504 0.500 p(y=4) satisfied 38,313 0.352 38,436 0.362 76,749 0.357 p(y=5) highly satisfied 8,496 0.078 8,398 0.079 16,894 0.079 total 108,909 1 106,101 1 215,010 1 logistic regression results: analysis for all services table 4 presents the estimated fy 2019 and fy 2020 results, respectively. the results of these estimates confirm that the statistically significant values in both the 2019 and 2020 estimates were the specific variables required to increase customer satisfaction. total financial assets (assets) are negatively correlated with customer financial literacy score (literacy) and positively correlated with customer satisfaction with regional banks. these findings support hypothesis 1. next, the explanatory variables indicating competition between banks demonstrate a positive and significant impact (p < 0.05) on customer satisfaction. this impact is evidenced by the degree of oligopoly (hhi). in other words, as competition among regional banks intensifies, they can conduct more sophisticated financial marketing analysis and offer more complex services to attract and retain existing customers. these results are interpreted as improved product suitability for customers and higher levels of customer satisfaction. conversely, the deposit share (shr) was not significant. in terms of demographic variables, gender (gender), age (age), and occupational status (occupation) were found to have a significant (p < 0.05) impact on customer satisfaction in both the 2019 and 2020 estimates. this impact indicates that customer satisfaction is typically higher among females than males, younger individuals than older ones, and those with employment than those without. table 4. ordered logistic regression results of customer satisfaction 2019 2020 coef. z stats. coef. z stats. gender -0.085 -8.680 *** -0.075 -7.170 *** age -0.008 -22.260 *** -0.009 -23.880 *** occupation -0.064 -7.060 *** -0.089 -9.370 assets -0.018 -6.610 *** -0.019 -6.510 *** mori et al., asian finance & banking review 8(1) (2024), 1-12 6 literacy -0.007 -9.310 *** -0.006 -7.560 *** hhi 0.000 -2.210 ** 0.000 -3.600 *** shr 0.000 -0.110 -0.001 -2.230 ** staff 0.290 18.750 *** 0.303 17.250 *** callcenter 0.235 7.950 *** 0.205 5.800 *** website 0.169 11.090 *** 0.158 9.150 *** events 0.102 2.460 ** 0.079 1.480 sns 0.020 0.570 0.051 1.140 pop-up 0.043 2.280 ** 0.015 0.690 trainads 0.056 2.410 ** 0.056 2.100 ** none -0.128 -7.780 *** -0.114 -6.170 *** deposits 0.494 24.190 *** 0.493 21.240 *** hloan 0.207 11.580 *** 0.243 12.930 *** investment 0.168 9.520 *** 0.198 10.150 *** insurance 0.111 5.370 *** 0.110 4.770 *** a number of obs. 75,690 75,690 log-likelihood／ pseudo r2 -85327.3 0.0273 -79954.08 0.0274 note. ***, ** and * represent the statistically significant coefficients at significance levels of 1, 5, and 10 percent, respectively. additionally, the impact of any benefits received by customers from regional banks on their satisfaction is considered through the channels through which they contacted the financial institution within a year. the impact of staff and call centers on customer satisfaction is significant, with a p-value of less than 0.01 in both the 2019 and 2020 estimates. it has been demonstrated that direct human contact with customers is an effective means of improving satisfaction. contact via the website (website) and train ads and direct mail (trainads) also demonstrated a significant impact on customer satisfaction (p < 0.01). conversely, events/seminars (events) and pop-up and tv online ads (pop-ups) significantly impacted customer satisfaction in 2019. however, this impact was insignificant in 2020. the effect of the global pandemic has resulted in a substantial decline in the ability of regional banks to organize events and seminars for their customers. this decline has been attributed to the loss of customer benefits associated with such events. conversely, the 2019 and 2020 estimates revealed that social networking services (sns) had no significant impact on satisfaction. given that japanese regional banks operate in rural areas, have a large number of older customers, and still need to have a high level of trust in social media information, it is likely that contact through this channel did not affect satisfaction levels. about the financial products they do business with, those who do business with a regional bank exhibited a positive and significant (p < 0.01) correlation with satisfaction for all products. we found that the services of deposits and settlements (deposits), housing loans (hloan), investment management (investment), and insurance and private pensions (insurance) have a more significant influence on customer satisfaction than in fy 2019. the level of significance was found to be higher in fy2020. table 5 presents the marginal effects, or the probability changes in the dependent variable for a one-unit change in the independent variable, for the estimated results in 2019 and 2020. the direction of the effect is contingent upon the sign of the coefficient. values greater than zero indicate an effect of increasing satisfaction, while values less than zero imply an impact of decreasing satisfaction. the direction of the effect is contingent upon the sign of the coefficient. values greater than zero indicate an effect that increases satisfaction, while values less than zero imply an effect that decreases satisfaction. regarding the customer benefits, the results indicate that the marginal effects for the categories "satisfied" and "very satisfied" categories are positive and significant. furthermore, the impact of “satisfied " was higher than that of "very satisfied." the marginal effects for events and seminars (events) and pop-up and tv online advertising (pop-up) were positive and significant for "satisfied" and "very satisfied" in 2019 but not substantial in 2020. the significance of this factor has now been eliminated. the above marginal effects indicate that if regional banks intensify or continue their efforts to utilize these channels and benefits to their customers, the probability of customer satisfaction and high satisfaction will increase. consequently, it can be posited that the strengthening and enhancement of contact from these channels can reduce the probability of customers being "unsatisfied" or "very dissatisfied." recognizing the significance of contacts from the distribution channel and the benefits provided to customers' needs is essential. this is because highly satisfied customers are more likely to form long-term relationships with the regional bank, which can deliver several performance outcomes to the customer or the bank while also providing significant benefits to the regional bank. among the socio-demographic variables, gender, age, and occupation negatively affected satisfaction in the 2019 and 2020 estimates. gender was positively correlated with satisfaction and high satisfaction, while occupation was negatively correlated with satisfaction and high satisfaction. it can be concluded that satisfaction is higher among females than males, among those who are unemployed than those who have a job, and among those who are younger than those who are older. this result may be attributed to the fact that longer relationships with regional banks and experience in asset management may lead to more rigorous evaluations of their services. the amount of financial assets (assets) and customers’ financial literacy scores (literacy) exhibited a negative effect (negative marginal effect for satisfaction and high satisfaction) in both 2019 and 2020. this result suggests that customers with more outstanding asset holdings and higher levels of financial literacy are less satisfied with the services provided by regional banks. therefore, these affluent and financially literate customers may seek more sophisticated services and professional advice. mori et al., asian finance & banking review 8(1) (2024), 1-12 7 table 5. marginal effects of benefits received on customer satisfaction 2019 2020 highly dissatisfied 1 dissatisfied 2 neutral 3 satisfied 4 highly satisfied 5 highly dissatisfied 1 dissatisfied 2 neutral 3 satisfied 4 highly satisfied 5 gender 0.004 (0.000) 0.007 (0.000) 0.021 (0.000) -0.021 (0.000) -0.013 (0.000) 0.003 (0.000) 0.006 (0.000) 0.019 (0.000) -0.017 (0.000) -0.011 (0.000) age 0.000 (0.000) 0.001 (0.000) 0.002 (0.000) -0.002 (0.000) -0.001 (0.000) 0.000 (0.000) 0.001 (0.000) 0.002 (0.000) -0.002 (0.000) -0.001 (0.000) occupation 0.003 (0.000) 0.005 (0.000) 0.016 (0.000) -0.015 (0.000) -0.010 (0.000) 0.004 (0.000) 0.007 (0.000) 0.023 (0.000) -0.021 (0.000) -0.013 (0.000) assets 0.001 (0.000) 0.002 (0.000) 0.004 (0.000) -0.004 (0.000) -0.003 (0.000) 0.001 (0.000) 0.002 (0.000) 0.005 (0.000) -0.004 (0.000) -0.003 (0.000) literacy 0.000 (0.000) 0.001 (0.000) 0.002 (0.000) -0.002 (0.000) -0.001 (0.000) 0.000 (0.000) 0.000 (0.000) 0.002 (0.000) -0.001 (0.000) -0.001 (0.000) hhi 0.000 (0.028) 0.000 (0.027) 0.000 (0.027) 0.000 (0.027) 0.000 (0.027) 0.000 (0.000) 0.000 (0.000) 0.000 (0.000) 0.000 (0.000) 0.000 (0.000) shr 0.000 (0.914) 0.000 (0.914) 0.000 (0.914) 0.000 (0.914) 0.000 (0.914) 0.000 (0.026) 0.000 (0.026) 0.000 (0.026) 0.000 (0.026) 0.000 (0.026) staff -0.014 (0.000) -0.025 (0.000) -0.072 (0.000) 0.067 (0.000) 0.043 (0.000) -0.014 (0.000) -0.025 (0.000) -0.077 (0.000) 0.071 (0.000) 0.045 (0.000) callcenter -0.011 (0.000) -0.020 (0.000) -0.059 (0.000) 0.055 (0.000) 0.035 (0.000) -0.009 (0.000) -0.017 (0.000) -0.052 (0.000) 0.048 (0.000) 0.030 (0.000) website -0.008 (0.000) -0.014 (0.000) -0.042 (0.000) 0.039 (0.000) 0.025 (0.000) -0.007 (0.000) -0.013 (0.000) -0.040 (0.000) 0.037 (0.000) 0.023 (0.000) events -0.005 (0.014) -0.009 (0.014) -0.025 (0.014) 0.024 (0.014) 0.015 (0.014) -0.004 (0.140) -0.006 (0.140) -0.020 (0.140) 0.019 (0.140) 0.012 (0.140) sns -0.001 (0.567) -0.002 (0.567) -0.005 (0.567) 0.005 (0.567) 0.003 (0.567) -0.002 (0.255) -0.004 (0.255) -0.013 (0.255) 0.012 (0.255) 0.008 (0.255) pop-up -0.002 (0.023) -0.004 (0.023) -0.011 (0.022) 0.010 (0.022) 0.006 (0.022) -0.001 (0.490) -0.001 (0.490) -0.004 (0.490) 0.003 (0.490) 0.002 (0.490) trainads -0.003 (0.016) -0.005 (0.016) -0.014 (0.016) 0.013 (0.016) 0.008 (0.016) -0.003 (0.036) -0.005 (0.036) -0.014 (0.036) 0.013 (0.036) 0.008 (0.036) none 0.006 (0.000) 0.011 (0.000) 0.032 (0.000) -0.030 (0.000) -0.019 (0.000) 0.005 (0.000) 0.009 (0.000) 0.029 (0.000) -0.027 (0.000) -0.017 (0.000) deposits -0.023 (0.000) -0.042 (0.000) -0.123 (0.000) 0.115 (0.000) 0.074 (0.000) -0.022 (0.000) -0.040 (0.000) -0.126 (0.000) 0.115 (0.000) 0.073 (0.000) hloan -0.010 (0.000) -0.018 (0.000) -0.051 (0.000) 0.048 (0.000) 0.031 (0.000) -0.011 (0.000) -0.020 (0.000) -0.062 (0.000) 0.057 (0.000) 0.036 (0.000) investment -0.008 (0.000) -0.014 (0.000) -0.042 (0.000) 0.039 (0.000) 0.025 (0.000) -0.009 (0.000) -0.016 (0.000) -0.051 (0.000) 0.046 (0.000) 0.029 (0.000) insurance -0.005 (0.000) -0.009 (0.000) -0.028 (0.000) 0.026 (0.000) 0.017 (0.000) -0.005 (0.000) -0.009 (0.000) -0.028 (0.000) 0.026 (0.000) 0.016 (0.000) note. values in parentheses are p-values. the results for satisfaction of customers holding investment-related products. for japanese regional banks, the provision of retail financial services, particularly in deposit-taking and settlement, represents a long-standing and historically significant aspect of their business. however, these services have traditionally been characterized by low profitability and a high degree of competitive intensity. the preceding analysis indicates that the satisfaction levels of customers of the same regional bank who utilize only traditional deposit and payment services will differ from those of customers who purchase investment-related products through the regional bank's channels. since customer satisfaction and loyalty have become increasingly important for these products, this section will focus on investment-related products. the estimation results, as presented in table 6, indicate that in both the 2019 and 2020 estimates, statistically significant values were also observed for customers holding investment-related products. this result is a specific variable that is required when increasing customer satisfaction. the significance of financial assets (assets) in the overall estimation has been eliminated in these estimation results. conversely, the financial literacy scores of customers are positive and both significant (p < 0.05), exerting an impact on customer satisfaction with their regional bank. next, an examination of the competitive landscape among banks reveals that the oligopoly herfindahl-hirschman index (hhi) exerts a positive and significant (p < 0.05) influence on customer satisfaction in 2019. however, this impact has yet to be evident in the 2020 estimates. in contrast to deposit settlement services, the services offered by regional banks for investment-related products are of critical importance. however, in 2020, due to the impact of the spread of the novel coronavirus, banks were likely to have encountered difficulties in their sales activities, and human contact with customers could have been more extensive. this result indicates that the effect on customer satisfaction is no longer significant. about the remaining socio-demographic variables, only age (age) exhibited a statistically significant (p < 0.05) impact on customer satisfaction in both the 2019 and 2020 estimates, while the other variables were not found to be significant. in other words, the results indicated that younger customers tend to be more satisfied with investment-related products than older customers in terms of age. mori et al., asian finance & banking review 8(1) (2024), 1-12 8 table 6. ordered logistic regression results of customer satisfaction with investment products 2019 2020 coef. z stats. coef. z stats. gender -0.046 -1.380 -0.020 -0.560 age -0.006 -4.460 *** -0.004 -3.130 *** occupation -0.010 -0.300 -0.010 -0.270 assets -0.011 -0.990 0.009 0.710 literacy 0.009 3.400 *** 0.011 4.140 *** hhi 0.000 2.500 ** 0.000 1.030 shr 0.000 0.090 -0.001 -0.480 staff 0.357 8.450 *** 0.378 8.530 *** callcenter 0.220 3.760 *** 0.267 4.100 *** website 0.169 4.820 *** 0.185 4.970 *** events 0.093 1.620 0.015 0.240 sns -0.017 -0.340 0.091 1.570 pop-up -0.045 -0.810 -0.009 -0.150 trainads 0.019 0.300 0.119 1.680 * none -0.151 -2.630 *** -0.106 -1.820 * deposits 0.290 6.660 *** 0.277 5.940 *** hloan 0.245 3.990 *** 0.151 2.350 *** insurance 0.150 3.120 *** 0.144 2.840 *** a number of obs. 5,219 4,935 log-likelihood／ pseudo r2 -6675.15 0.0343 -6100.70 0.0367 note. ***, ** and * represent the statistically significant coefficients at significance levels of 1, 5, and 10 percent, respectively. table 7. marginal effect of customer satisfaction with investment products 2019 2020 highly dissatisfied 1 dissatisfied 2 neutral 3 satisfied 4 highly satisfied 5 highly dissatisfied 1 dissatisfied 2 neutral 3 satisfied 4 highly satisfied 5 gender 0.003 (0.170) 0.006 (0.169) 0.009 (0.168) -0.008 (0.168) -0.010 (0.168) 0.001 (0.574) 0.002 (0.573) 0.004 (0.574) -0.003 (0.574) -0.004 (0.573) age 0.000 (0.000) 0.001 (0.000) 0.001 (0.000) -0.001 (0.000) -0.001 (0.000) 0.000 (0.002) 0.000 (0.002) 0.001 (0.002) -0.001 (0.002) -0.001 (0.002) occupation 0.001 (0.767) 0.001 (0.767) 0.002 (0.767) -0.002 (0.767) -0.002 (0.767) 0.001 (0.788) 0.001 (0.788) 0.002 (0.788) -0.002 (0.788) -0.002 (0.788) assets 0.001 (0.324) 0.001 (0.324) 0.002 (0.323) -0.002 (0.323) -0.002 (0.324) 0.000 (0.477) -0.001 (0.477) -0.002 (0.477) 0.001 (0.477) 0.002 (0.478) literacy -0.001 (0.001) -0.001 (0.001) -0.002 (0.001) 0.001 (0.001) 0.002 (0.001) -0.001 (0.000) -0.001 (0.000) -0.002 (0.000) 0.002 (0.000) 0.002 (0.000) hhi 0.000 (0.014) 0.000 (0.013) 0.000 (0.012) 0.000 (0.012) 0.000 (0.012) 0.000 (0.306) 0.000 (0.305) 0.000 (0.305) 0.000 (0.305) 0.000 (0.305) shr 0.000 (0.927) 0.000 (0.927) 0.000 (0.927) 0.000 (0.927) 0.000 (0.927) 0.000 (0.632) 0.000 (0.632) 0.000 (0.632) 0.000 (0.632) 0.000 (0.632) staff -0.023 (0.000) -0.043 (0.000) -0.068 (0.000) 0.058 (0.000) 0.076 (0.000) -0.021 (0.000) -0.042 (0.000) -0.078 (0.000) 0.064 (0.000) 0.077 (0.000) callcenter -0.014 (0.000) -0.026 (0.000) -0.042 (0.000) 0.036 (0.000) 0.047 (0.000) -0.015 (0.000) -0.030 (0.000) -0.055 (0.000) 0.045 (0.000) 0.054 (0.000) website -0.011 (0.000) -0.020 (0.000) -0.032 (0.000) 0.027 (0.000) 0.036 (0.000) -0.010 (0.000) -0.020 (0.000) -0.038 (0.000) 0.031 (0.000) 0.037 (0.000) events -0.006 (0.106) -0.011 (0.105) -0.018 (0.104) 0.015 (0.105) 0.020 (0.104) -0.001 (0.809) -0.002 (0.809) -0.003 (0.809) 0.003 (0.809) 0.003 (0.809) sns 0.001 (0.733) 0.002 (0.733) 0.003 (0.733) -0.003 (0.733) -0.004 (0.733) -0.005 (0.117) -0.010 (0.117) -0.019 (0.116) 0.015 (0.116) 0.019 (0.116) pop-up 0.003 (0.420) 0.005 (0.419) 0.009 (0.419) -0.007 (0.419) -0.010 (0.419) 0.001 (0.884) 0.001 (0.884) 0.002 (0.884) -0.002 (0.884) -0.002 (0.884) trainads -0.001 (0.765) -0.002 (0.765) -0.004 (0.765) 0.003 (0.765) 0.004 (0.765) -0.007 (0.097) -0.013 (0.094) -0.024 (0.094) 0.020 (0.095) 0.024 (0.094) none 0.010 (0.010) 0.018 (0.009) 0.029 (0.009) -0.025 (0.008) -0.032 (0.009) 0.006 (0.073) 0.012 (0.067) 0.022 (0.069) -0.018 (0.067) -0.022 (0.069) deposits -0.019 (0.000) -0.035 (0.000) -0.056 (0.000) 0.047 (0.000) 0.062 (0.000) -0.015 (0.000) -0.031 (0.000) -0.057 (0.000) 0.047 (0.000) 0.056 (0.000) hloan -0.016 (0.000) -0.029 (0.000) -0.047 (0.000) 0.040 (0.000) 0.052 (0.000) -0.008 (0.021) -0.017 (0.019) -0.031 (0.018) 0.026 (0.019) 0.031 (0.019) insurance -0.010 (0.002) -0.018 (0.002) -0.029 (0.002) 0.024 (0.002) 0.032 (0.002) -0.008 (0.005) -0.016 (0.005) -0.030 (0.005) 0.024 (0.005) 0.029 (0.005) note. values in parentheses are p-values. the influence of the benefits received by customers on their satisfaction with the financial institution is gauged by examining the channels through which they contacted the institution within one year. the results of the overall estimation are consistent with those of the two-year estimates, with staff (staff) and call centers (callcenter) having a significant impact (p < 0.01) in both 2019 and 2020. as anticipated, investment-related products possess intricate content, rendering direct human contact with customers a productive strategy for enhancing customer satisfaction. furthermore, contact via mori et al., asian finance & banking review 8(1) (2024), 1-12 9 the website (website) also had a significant impact on customer satisfaction (p < 0.01), as it allows for the communication of complex and large amounts of information to customers via the website, which is also effective in improving satisfaction. conversely, train ads and direct mail (trainads) are significant in the overall estimate but not for investment-related products. events and seminars (events) and pop-up ads and tv online ads (pop-up) are significant in the overall estimate, but not for investment-related products. given the nature of the products, namely investment-related products, social networking and train advertising did not significantly impact customer satisfaction. another factor that may have influenced the results in 2020 was the difficulty in reaching customers due to the global pandemic caused by the novel coronavirus, covid-19. the marginal effect estimates in table 7 demonstrate that for benefits received by customers, staff (staff), call center (callcenter), and contact via the website (website) in 2019 and 2020, the marginal effects for "satisfied" and "very satisfied" were positive and significant in both years. furthermore, the marginal effect for "very satisfied" was higher than for "satisfied." the results indicated a positive and significant marginal effect for train ads and direct mail (trainads) in 2020 about the categories of "satisfied" and "very satisfied." the marginal effects for the categories "satisfied" and "very satisfied" for events and seminars (events) and popup and tv online advertising (pop-up) were not significant in the model estimates for both 2019 and 2020. the marginal effects were insignificant for the model estimates of "satisfied" and "very satisfied." the results of the marginal above impact indicate that customer satisfaction with investment-related products is positively correlated with higher levels of satisfaction when approached directly by regional banks. regional banks are also more proactive in approaching customers with investment-related products, i.e., those with higher marginal returns per customer, to increase customer satisfaction and loyalty. among the socio-demographic variables, only age (age) demonstrated a negative effect, as evidenced by a negative marginal effect on satisfaction and a high level of satisfaction. this effect was statistically significant in the 2019 and 2020 marginal effect estimates. nevertheless, the effect was relatively modest in magnitude. the variables gender (gender), occupation (occupation), and assets held (assets) were all found to be insignificant. financial literacy exhibited a positive marginal effect for 2019 and 2020 regarding satisfactory and highly satisfactory outcomes. this result suggests that customers with higher levels of financial literacy are more satisfied with the services provided by regional banks. nevertheless, the effect is relatively modest in size. this result contradicts the overall estimate, indicating that for customers with high financial literacy, the direct approach from the regional bank positively affects satisfaction, albeit modestly. this result implies that although customers are satisfied with the approach from the regional bank, it cannot be ruled out that they may be seeking further quality improvement, namely a higher level of service and more specialized advice. discussions the model estimation in this study demonstrated that, in addition to direct salesperson contact, customer satisfaction was influenced by various demographic variables, including age, occupational status, total financial assets, and financial literacy. furthermore, the study revealed that the convenience of web-based contact also influenced customer satisfaction. conversely, an analysis of total financial assets and the ownership of investment-related products revealed that customers with higher financial assets and those with investment-related products exhibited a more pronounced impact on satisfaction. in particular, contacts from staff and call centers were a positive indicator, indicating that direct human contact was more practical for increasing customer satisfaction than e-banking, such as social networking. this result is related to the specific context of banking service provision in japan, where the continued effectiveness of in-person financial advice from physical branches, particularly for customers with limited financial literacy, is particularly evident in rural areas. conclusions while we know the importance of e-banking services, this study analyzed customer satisfaction with face-to-face financial services, which are the predominant type of service banks offer to retail customers in japan. in particular, we examined the quality of banking services, focusing on the importance of human contact, including information provision and personnel involvement. as anticipated, the results demonstrated that e-banking services, human contact, and investment advice significantly impact customer satisfaction. the japanese banking system plays a more significant role than direct finance, particularly in the local economy. nevertheless, the level of customer satisfaction with regional banks' retail services needs to be sufficiently examined. most previous studies focus on a single bank or employ few respondents. this study contributes to the existing literature by focusing on unique data from a large sample of customers drawn from japanese regional banks with an extensive branch network in rural and urban areas. the novel aspect of our research approach is that we consider customer contact as a determinant of customer satisfaction, in contrast to numerous studies that have investigated customer satisfaction through different service quality dimensions. moreover, our study incorporates several socio-demographic factors into the econometric modeling as determinants of customer satisfaction. the findings of this study demonstrate the significance of customer satisfaction in the retail financial sector of regional banks. in-person financial advice and services remain a highly valued aspect of the industry despite the growing prominence of e-banking services. individual customer behavior is in a state of constant flux. as consumers become more informed, financially literate, and more experienced in investing, they will change their investment decisions and risk-taking levels. it will be crucial for banks to enhance their financial marketing techniques, including identifying consumer profiles, providing tailored services, monitoring the factors influencing customer satisfaction with customer service, and implementing ai in addressing customers' financial issues. improving customer service is an increasingly important aspect of bank management strategy, as it enhances customer satisfaction and profitability. mori et al., asian finance & banking review 8(1) (2024), 1-12 10 although this study contributes to the existing literature, it needs to be more comprehensive in understanding more detailed factors such as convenience, environment, quality, prices, and e-banking. additionally, there are limitations in understanding information such as customers' income and education. consequently, a future research direction would be to consider supplementing the data set with a data set of variables that can proxy for these factors. a further direction of this study will be to provide more evidence for these results by using e-banking-specific validation. author contributions: conceptualization, y.m., y.o. and k.h.; methodology, y.m. and y.o.; software, y.m. and y.o.; validation, y.m. and y.o.; formal analysis, y.m.; investigation, y.m.; resources, y.m. and y.o.; data curation, y.m. and y.o.; writing – original draft preparation, y.m.; writing – review & editing, y.m.; visualization, y.m.; supervision, y.o. and k.h.; project administration, y.o. and k.h.; funding acquisition, k.h. authors have read and agreed to the published version of the manuscript. institutional review board statement: ethical review and approval were waived for this study due to that the research does not deal with vulnerable groups or sensitive issues. funding: this research was supported by jsps kakenhi grant number jp 23k01478. acknowledgements: we would like to acknowledge all faculty members, staffs, and fellows of takasaki city university of economics, kushiro public university of economics and ritsumeikan university, each of whom has provided advice and guidance 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(2020). do socio-demographic characteristics and financial literacy matter in selecting islamic financial products? journal of islamic monetary economics and finance, 6(1), 51-76. https://doi.org/10.21098/jimf.v6i1.1057 publisher’s note: asian finance & banking society stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2024 by the authors. licensee asian finance & banking society, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). asian finance & banking review (p-issn 2576-1161 e-issn 2576-1188) by asian finance & banking society is licensed under a creative commons attribution 4.0 international license. https://doi.org/10.21098/jimf.v6i1.1057 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ asian finance & banking review 8(1) (2024), 13-29 13 finance & banking review asfbr vol 8 no 1 (2024) p-issn 2576-1161 e-issn 2576-1188 journal homepage: https://www.cribfb.com/journal/index.php/asfbr published by asian finance & banking society, usa evaluating financial synergy in bank merger: ranking merger options and analyzing influential factors gourav roy (a)1 (a) lecturer, bangladesh institute of capital market (bicm), dhaka, bangladesh; e-mail: gouravroy.du@gmail.com a r t i c l e i n f o article history: received: 5th march 2024 reviewed & revised: 6th march to 26th june 2024 accepted: 30th june 2024 published: 4th july 2024 keywords: merger, synergy, financial factors, simulation, sensitivity, valuation, banks, emerging economy, bangladesh. jel classification codes: g34, g32, c51, g21 peer-review model: external peer-review was done through double-blind method. a b s t r a c t given the excess number of banks, the central bank of bangladesh recently saw mergers as a good solution for economic development in an emerging economy like bangladesh. still, the question remained: which bank should merge with whom to create value, known as financial synergy? the study investigates which mergers add value to financial synergy and which do not. additionally, the study scrutinizes the financial factors that influence the financial synergies resulting from the mergers of the participating banks. this study employs fifty-five possible cases of mergers found in eleven banks, including government, non-government, and specialized banks, to conduct financial synergy valuations on the average of five years of financial information. the methodology employs simulation, sensitivity, trend, scenario, ordinary least squares (ols), and mixed effect generalized linear model (meglm) to solve the research questions. the results reveal that mergers between bkb and rakub, exim and padma, nbl, and ucb can result in positive financial synergy among the six cases proposed by the central bank. the results also show that financial factors including debt to capital, reinvestment rate, return on capital, cost of debt, and revenues significantly impact the financial synergy. the findings of the study suggest the central bank merge based on the ranking provided in the study, considering the influential factors in mergers among banks. these findings contribute to the existing field of study by optimizing the synergy valuation strategies for bank mergers in a complex environment of bank types. © 2024 by the authors. licensee asian finance & banking society, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). introduction synergy is the idea that when different business units inside complex organizations operate together as a unified system, they can create more value than if they were to function independently. this means that if two companies named a and b merge, and the merged company is named ab, the resultant comparative value will be: v(ab) > v(a) + v(b) (i) from equation (i), if the value of synergy is to be determined, the equation for synergy will be: v(synergy) = v(ab) – v(a) – v(b) (ii) recently, bangladesh bank (the central bank of bangladesh) has decided to amalgamate weak banks with strong banks (dhaka tribune, march 13, 2024). after that, bangladesh bank published a guideline for the merger of the banks on april 04, 2024. later, the question of which banks to merge with whom was uncovered with eleven banks namely sonali bank plc to merge with bangladesh development bank plc (case 1), bangladesh krishi bank (bkb) to merge with rajshahi krishi unnayan bank (rakub) (case 2), basic bank plc to merge with city bank plc (case 3), exim bank limited to merge with padma bank plc (case 5), and national bank limited to merge with united commercial bank plc (case 6) (somoy business desk, 2024). it was also though earlier that basic bank plc could be merged with agrani bank plc (case 4) (tbs report, 2024). the study is relevant because, bangladesh has more scheduled banks in number 1corresponding author: orcid id: 0000-0001-9782-9103 © 2024 by the authors. hosting by asian finance & banking society. peer review under responsibility of asian finance & banking society, usa. https://doi.org/10.46281/asfbr.v8i1.2219 to cite this article: roy, g. (2024). evaluating financial synergy in bank merger: ranking merger options and analyzing influential factors. asian finance & banking review, 8(1), 13-29. https://doi.org/10.46281/asfbr.v8i1.2219 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://www.openaccess.nl/en https://doi.org/10.46281/asfbr.v8i1.2219 https://orcid.org/0000-0001-9782-9103 roy, asian finance & banking review 8(1) (2024), 13-29 14 than required to serve the money market. the growing non-performing loans (npls), shortage of liquidity, depositors’ lacking confidence, and financial distress are making the existence of most of these banks vulnerable. the central bank assumed this problem and decided to merge among banks. from the dilemma of which bank to merge with whom, the problem statement of the study is the picking of the best options out of the fifty-five possible solutions of valuation. also, there exists a concern that which financial factors actually contribute most to the financial synergy, because such factors can be controlled and optimized for increasing synergy value. the study aims to provide a solution of ranking based on financial synergy out of the existing possible options of banks. additionally, the study estimates the factors that impact the financial synergies of the merged banks, which is its second research objective.the novelty of the study is using synergy valuation and econometric techniques to rank and identify influential financial factors in emerging economy banks, providing a basis for further research in merger and acquisition. the study begins by introducing the concept and its relevance, followed by a review of existing literature from key research objectives and theoretical backgrounds. next, the materials and methods explain the techniques used to determine synergy values for different options and factor analysis. later, the results and discussions provide the outcomes and explanations that align with the objectives. finally, the study concludes with key insights, novelty, and future research avenues. literature review mergers tend to form across the world under different dimensions. to generate financial synergy out of it, forecasting becomes a great task to solve, also the factors influencing these values should be identified properly. this section details earlier studies that meet the research objectives criterion. mergers and financial synergies mergers are a common practice in corporate finance and restructuring that enhance a company's growth and competitiveness (sui et al., 2016; gaughan, 2018). the merger is the process of combining the assets of two companies who have decided to merge their activities (ben letaifa, 2017). the merger enhances revenue and reduces costs by fostering synergy between the acquiring and target companies (majumdar et al., 2012). firms engage in mergers and acquisitions (m&a) primarily to expand their operations, as growth is essential for their survival (akinbuli & kelilume, 2013). a study on power plants of usa was done where 5% synergy in operating efficiency has been observed (demirer & karaduman, 2022). a study on us banks found that mergers are inefficient in improving x efficiency and scale efficiency, and that factors affecting performance also affect their performance (peristiani, 1997). a study on the context of north macedonia showed that banks’ efficiency falls 83.33% to 70.06% after merger in 2011 and to 66.36% in 2020 (fotova čiković et al., 2022). a study on merger of 52 horizontal bank in europe from 1994 to 1998 shows that merger don’t contribute to greater market power (huiziniga et al., 2001). another study from 1994 to 2001, done on 134 individual banks on 11 eu countries to understand the impact of merger on banks prove that merger and consolidation is beneficial in technical aspects (ebodume & omarov, 2007). a study on european commission institutions over 492 takeovers show that mergers between domestic and crossborder banks of similar size have a substantial positive impact on the performance of the merged institutions (vennet, 1996). if the scenario is shifted to indian economy, analysis conducted on bank mergers from 2019 to 2020 reveals a rise in the financial value of the banks being acquired, benefiting their owners (herwadkar et al., 2023). in bangladesh, merger in banking industry is being experienced after a long time, thus, the question is highly relevant whether such mergers will cause synergistic value, and if yes, which mergers will do so. factors affecting mergers and synergies the value of synergy has been properly modeled in a paper where synergy has been categorized in operating synergy and financial synergy (damodaran, 2005). in this study, the author has provided a beautiful elaboration of how financial synergy can be calculated. the factors that have been considered are mostly the inputs to the calculation of the financial synergy. in a study on understanding the impact of different factors on mergers and acquisitions (mucenieks, 2018), the author identified few financial factors which contribute the m&a. in nepal, its’ been found that the factors that are the inputs to calculation of financial synergy are significantly impactful to financial synergy (sharma, 2018). a study investigated the determinants of the anticipated synergy resulting from a merger or acquisition, based on an analysis of previous mergers and acquisitions in the banking sector of a european union country. two out of the five elements have been modeled using dynamic simulation based on high-quality research and found significant impacting synergy value (yiannis et al., 2007). a study on the mechanical engineering companies of czech republic indicated a statistically significant correlation between the indicators derived from cash flow and the value of synergy (režňáková & pěta, 2018). a study on saarc and asean regions found that free cash flows have positive impact on synergy while firm size is insignificant (khan & bin tariq, 2023). theoretical background the financial synergy is mainly generated from diversification, cash slack and tax benefits (damodaran, 2005). to consider the fragmentation of all these factors, financial statements’ outputs were considered. a study was done to find out factors impacting financial synergy where key financial factors are chosen as independent variables to judge the synergy (darayseh & alsharari, 2022). simulation strategy was used in measuring impacts of variables on synergy (yiannis et al., 2007).) a study used key financial factors to compare against synergy to find the significance (mucenieks, 2018). this study focuses on banks in emerging economies, including government and non-government commercial and specialized banks, as previous literature only focuses on pre-event and post-event analysis, lacking simulation methodology to judge every dimension of values from synergy valuation. roy, asian finance & banking review 8(1) (2024), 13-29 15 purpose of the study and hypothesis the purpose of the study is to prepare a ranking list of best options of banks, mergers between which will result in maximum financial synergy. the study afterward finds the influential financial factors that contribute to the financial synergy. for meeting the second objective, the hypothesis will be as follows: ha: there exists significant relationship between different financial factors and the synergy value. materials and methods research design (first research objective) figure 1. research design for first research objective the research design in figure 1 employs financial inputs for calculating the synergy value which finally contribute as independent variables in figure 2. which mergers create synergy? determination of inputs finding proxies of the banks for beta risk-free rate country risk premium risk premium valuation of the banks (stand alone and combined) pre-tax cost of debt tax rate debt/capital ratio revenues ebit pre-tax return on capital reinvestment rate length of growth period calculation of synergy outputs (stand alone and comnbined) cost of equity afetr-tax cost of debt cost of capital afetr-tax return on capital reinvestment rate expected growth rate value of synergy value of individual firms synergy calculation best synergy case analysis simulation sensitivity trend analysis scenario analysis roy, asian finance & banking review 8(1) (2024), 13-29 16 research design (second research objective) figure 2. research design for second research objective the figure 2 provides categories of variables, and tests to be performed to test the hypothesis. data the data is the audited financial statements of the banks for the five years from 2018 to 2022. for risk-free rate calculation, average of 5 years’ 10-year treasury bond cut-off yield data collected from the bangladesh bank is used. for country risk premium, as of a study in nyu (damodaran, 2024), the data has been considered for bangladesh. the risk premium is calculated from the average dsex return for the last five years. variables the second research objective requires the same independent and dependent variables including few control variables. which financial factors impact the financial synergy? variables dependent independent control diagonostic tests before regression descriptive statistics correlation with p values empirical analysis ols meglm diagonostic tests after regression test of heteroskedasticity test of multicollinearity roy, asian finance & banking review 8(1) (2024), 13-29 17 figure 3. identification of variables the inputs to synergy have been considered independent variables (damodaran, 2005). studies have found that firm size has been a significant variable in determining synergy (moeller et al., 2004; ellis, 2005; susanti & restiana, 2018; utami, 2023). firm size significantly impacts the success of a merger (chen, 1991; fama & french, 1993). a study was done on firm’s value and firm structure that incorporate year of establishment as a control variable (al-saidi & alshammari, 2014; susanti & restiana, 2018). there is a good correlation between number of branches and banks’ performances that finally contribute to the banks’ enterprise value (hirtle, 2005). a study on understanding branch network structure and bank’s profitability tried to implicate the impact of branch networks on profitability that meets the enterprise value (fuchs et al., 2024). a study on the relation between human capital and firm value (sisodia et al., 2021) revealed a significant relation between the employee size and firm value (sisodia et al., 2021). thus, the study has incorporated firm size, date of establishment, number of branches, number of districts of operation, and number of employees as control variables. methodology for determining variables table 1. characteristics of the data type of data quantitative scale of data ratio level source of data audited financial statements from 2018 to 2022 model based variables cross-sectional dependent variable one independent variables nine control variables five the formulas of the research are derived from (damodaran, 2005), (cfi, 2024) and authors’ own analysis. variables research objective 1 forecast varibale financial synergy predictor assumptions risk-free rate country risk premium risk premium beta pre-tax cost of debt tax rate debt/capital ratio revenues ebit pre-tax return on capital reinvestment rate length of growth period research objective 2 dependent variable financial synergy independnet variables beta (combined) pre-tax cost of debt (combined) tax rate (combined) debt/capital (combined) revenues (combined) ebit (combined) pre-tax return on capital (combined) reinvestment rate (combined) length of growth period (combined) control variables firm size date of establishment number of branches number of districts of operation number of employees roy, asian finance & banking review 8(1) (2024), 13-29 18 table 2. derivation of dependent variable particular formula financial synergy (value of the merged firms) – ∑value of the firms standalone table 3. derivation of formulas for independent variables particulars formula risk-free rate (rf) ∑ 10 𝑦𝑒𝑎𝑟 𝐵𝐺𝑇𝐵 𝐶𝑢𝑡𝑜𝑓𝑓 𝑌𝑖𝑒𝑙𝑑2022 2018 5 country risk premium 6.58% risk premium (rp) ∑ 𝐷𝑆𝐸𝑋 𝐼𝑛𝑑𝑒𝑥 𝑅𝑒𝑡𝑢𝑟𝑛 + 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝑅𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 − 𝑅𝑖𝑠𝑘𝑓𝑟𝑒𝑒 𝑅𝑎𝑡𝑒2022 2018 5 beta (β) (standalone) ∑ 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐵𝑒𝑡𝑎 𝑓𝑜𝑟 𝑃𝑟𝑜𝑥𝑦 𝐵𝑎𝑛𝑘𝑠 𝐿𝑖𝑠𝑡𝑒𝑑 𝑖𝑛 𝐷𝑆𝐸𝑋2022 2018 5 pre-tax cost of debt (standalone) ∑ 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 𝑇𝑜𝑡𝑎𝑙 𝑙𝑜𝑛𝑔𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 2022 2018 5 tax rate (tc) (standalone) ∑ 𝑇𝑎𝑥 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝐵𝑒𝑓𝑜𝑟𝑒 𝑇𝑎𝑥 (𝐸𝐵𝑇) 2022 2018 5 debt/capital ratio (d/c) (standalone) ∑ 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 2022 2018 5 revenues (standalone) ∑ 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠2022 2018 5 earnings before interest and taxes (ebit) (standalone) ∑ 𝐸𝐵𝐼𝑇2022 2018 5 pre-tax return on capital (standalone) ∑ 𝐸𝐵𝐼𝑇 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 2022 2018 5 reinvestment rate (standalone) ∑ 𝑁𝑒𝑡 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 + 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑁𝑒𝑡 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝐵𝐼𝑇(1 − 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒) 2022 2018 5 length of growth period (standalone) the continuing period of profit or, diminishing rate of loss. beta (combined) [ 𝛽1 1 + {(1 − tc1) × 𝐷 𝐶 1 1 − 𝐷 𝐶 1 } × 𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 (𝐸𝑉) 1 𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 (𝐸𝑉)1 + 𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒(𝐸𝑉) 2 ] + [ 𝛽2 1 + {(1 − tc2) × 𝐷 𝐶 2 1 − 𝐷 𝐶 2 } × 𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 2 𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 (𝐸𝑉) 1 + 𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 (𝐸𝑉) 2 ] pre-tax cost of debt (combined) (𝑃𝑟𝑒𝑡𝑎𝑥 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐷𝑒𝑏𝑡1 × 𝐸𝑉1) + (𝑃𝑟𝑒𝑡𝑎𝑥 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐷𝑒𝑏𝑡2 × 𝐸𝑉2) 𝐸𝑉1 + 𝐸𝑉2 tax rate (combined) (𝑇𝑐1 × 𝐸𝑉1) + (𝑇𝑐2 × 𝐸𝑉2) 𝐸𝑉1 + 𝐸𝑉2 debt/capital ratio (combined) (𝐷/𝐶1 × 𝐸𝑉1) + (𝐷/𝐶2 × 𝐸𝑉2) 𝐸𝑉1 + 𝐸𝑉2 revenues (combined) revenue 1 + revenue 2 ebit (combined) ebit 1 + ebit 2 pre-tax return on capital (roc) (combined) (𝑃𝑟𝑒𝑡𝑎𝑥 𝑅𝑂𝐶1 × 𝐸𝑉1) + (𝑃𝑟𝑒𝑡𝑎𝑥 𝑅𝑂𝐶2 × 𝐸𝑉2) 𝐸𝑉1 + 𝐸𝑉2 reinvestment rate (rr) (combined) (𝑅𝑅1 × 𝐸𝑉1) + (𝑅𝑅2 × 𝐸𝑉2) 𝐸𝑉1 + 𝐸𝑉2 length of growth period (n) (combined) average of the banks’ growth. here, “1” stands for 1st company and “2” stands for 2nd company applicable for merger. roy, asian finance & banking review 8(1) (2024), 13-29 19 in case of standalone valuation, the inputs to these calculations are of individual banks. on the other hand, in case of combined valuation or merger, the inputs are those which are calculated for the combined cases. table 4. outputs to calculate financial synergy (both for the cases of standalone and combined) particular formula cost of equity (ke) rf + β × rp after-tax cost of debt (kd) pre-tax cost of debt × (1-tc) cost of capital (kc) {ke × (1-d/c)} + (kd × d/c) after-tax return on capital pre-tax return on capital × (1tc) expected growth rate (g) reinvestment rate × after-tax return on capital pv of fcff {𝐸𝐵𝐼𝑇 × (1 − 𝑇𝑐) × (1 − 𝑅𝑅)} × (1 + 𝑔) × {1 − (1 + 𝑔)𝑛 (1 + 𝑘𝑐)𝑛 terminal value (tv) 𝐸𝐵𝐼𝑇 × (1 − 𝑇𝑐) × (1 + 𝑔)𝑛 × (1 + 𝑅𝑓) × (1 − 𝑅𝑓) 𝐾𝑐 𝐾𝑐 − 𝑅𝑓 enterprise value (ev) pv of fcff + 𝑇𝑉 (1+𝐾𝑐)𝑛 value of the firm (standalone) ev1+ev2 here, “1” stands for 1st company and “2” stands for 2nd company applicable for merger. methodology for analysis for research question 1 crystal ball, a valuation software, determines financial synergy for multiple cases, with a total of fifty-five possible cases for synergy valuation using the combination method (iii). c (n, r) = 𝑛! 𝑟!(𝑛−𝑟)! (iii) the study evaluates the financial synergy of six merger proposals from bangladesh bank through 10,000 simulations. sensitivity analysis identifies sensitive factors, trend analysis predicts maximum and minimum synergy values, and scenario analysis determines changes in synergy value for 0% to 100% changes in independent variables. methodology for analysis for research question 2 table 5. the definition and codes for the variables codes definition codes definition beta_c the combined beta rr_c the combined reinvestment rate cod_c the combined pre-tax cost of debt lgr_c the combined length of growth period tax_c the combined tax rate firmsize the average of the firm sizes of merging banks d/c_c the combined debt to total capital est the average of the banks’ years of establishments revenues_c the combined revenues branch the average of the banks’ number of branches ebit_c the combined earnings before interest and taxes districts the average of the number of districts the banks have operation roc_c the combined pre-tax return on capital hr the average of number of employees of the banks the model estimation the research question 02 required two models to estimate. one is the ordinary least square (ols) and the other is mixed effect gaussian generalized linear model (meglm). the basic ols model is shown below: y = α + βixi + ε (iv) from equation (ii), the derived ols model for this research is shown below: y = α + β1beta_c + β2ln_cod_c + β3tax_c + β4d/c_c + β5revenues_c + β6ebit_c + β7roc_c + β8rr_c + β9lgr_c + β10ln_firmsize + β11ln_est + β12branch + β13districts + β14ln_hr + ε (v) for ensuring normality of data principle, cost of debt, date of establishment, hr and firm size are log normalized in ols and only cost of debt in meglm. from equation (iii), for building a model for meglm, almost everything in the ols is reiterated except for link and identity functions. the basic meglm function is shown below: g(e(yi)) = e(yi) = α + βixi + ε (vi) from equation of the regarding link and identity, the following parameters are conventionally used: table 6. glm specification distribution natural parameter canonical link gaussian (normal) µ identity roy, asian finance & banking review 8(1) (2024), 13-29 20 from the table 3, the final model to be followed is shown below: g(µ) = α + β1beta_c + β2ln_cod_c + β3tax_c + β4d/c_c + β5revenues_c + β6ebit_c + β7roc_c + β8rr_c + β9lgr_c + β10firmsize + β11est + β12branch + β13districts + β14hr ++ ε (vii) here, y and g(µ) are the representatives of value of synergy which is the dependent variable. the α stands for the constant terms, βi stands for the coefficients and ε stands for the random error terms. results results from research question 01 the results of six cases of mergers are summarized below: simulation results for six cases (figures in crore of bdt) case 01. sbl merges bdbl case 02. bkb merges rakub case 03. basic merges city bank case 04. basic merges agrani case 05. exim merges padma case 06. ucb merges nbl figure 4. simulation results for six cases of proposed mergers (figures in crore of bdt) the simulation using 10,000 trials in crystal ball, results from figure 4 show that case 2, 5, and 6 result in positive financial synergy while others end in negative financial synergy. roy, asian finance & banking review 8(1) (2024), 13-29 21 sensitivity results for six cases case 01. sbl merges bdbl case 02. bkb merges rakub case 03. basic merges city bank case 04. basic merges agrani case 05. exim merges padma case 06. ucb merges nbl figure 5. sensitivity results for six cases of proposed mergers the sensitivity using 10,000 trials in crystal ball, results from figure 5 show that the most sensitive factors in all cases have been debt to capital ratio, pre-tax cost of debt, ebit, and risk-free rate. roy, asian finance & banking review 8(1) (2024), 13-29 22 trend analysis for six cases case 01. sbl merges bdbl case 02. bkb merges rakub case 03. basic merges city bank case 04. basic merges agrani case 05. exim merges padma case 06. ucb merges nbl figure 6. trend analysis for six cases of proposed mergers the results, using 10,000 trials in crystal ball in figure 6, show that case 2, 5, and 6 have positive and less risky spectrum of trend of synergy value. on the other hand, case 1, 3, and 4 have negative and bigger spectrum of trend of synergy value. roy, asian finance & banking review 8(1) (2024), 13-29 23 scenario analysis (in crore of bdt) table 7. scenario analysis for the six cases cases mean standard deviation minimum maximum case 01: sbl merges bdbl -640.8 113.2 -1,392.90 -254.7 case 02: bkb merges rakub 1,704.70 461.1 -70.8 6,423.70 case 03: basic merges city bank -1,556.00 739.1 -4,998.00 5,279.40 case 04: basic merges agrani -59.4 246.8 -2,206.90 1,035.50 case 05: exim merges padma 4,297.90 1,904.80 -6,748.70 13,831.10 case 06: nbl merges ucb 2,303.90 1,871.00 -33,092.50 29,892.20 the scenario, using 10,000 trails in crystal ball, analysis shows that in case of 0.1% change takes place in each of the independent variables, the mean stands negative for case 1, 3, and 4. the variability is higher in case 5 and 6. the optimum synergy is found in case 2, 5, and 6. possible merger solution of forty-nine cases for 10,000 trials each case (in crores of bdt) table 8. ranking of value of possible mergers number of simulated cases merger parties mean synergy minimum synergy maximum synergy most sensitive factor (positive) most sensitive factor (negative) synergy range (90% confidence) synergy range (75% confidence) rank 01 agrani & city bank (1,089.9) (18,425.9) 2,682.2 debt/capital ratio (agrani) debt/capital ratio (city bank) (1,000) to (1,100) (900) to (1,300) 41 02 agrani & exim (872.98) (4,541.7) 452.6 debt/capital ratio (agrani) debt/capital ratio (exim bank) (820) to (890) (780) to (950) 38 03 agrani & padma 1,468.8 (77.1) 3,587.5 risk-free rate ebit (padma) 1,420 to 1,510 180 to 1,580 29 04 basic & exim (923.8) (2,544.5) 3,516.1 debt/capital ratio (exim bank) debt/capital ratio (basic) (850) to (950) (810) to (1,010) 39 05 basic & padma 1,681.1 3,418.6 790.8 risk-free rate pre-tax cost of debt (padma) 1640 to 1710 1,590 to 1,790 26 06 bdbl & agrani 23.8 (206.8) 356.4 tax rate (bdbl) debt/capital ratio (bdbl) 10 to 30 02 to 39 34 07 bdbl & basic 358.5 95 881.8 debt/capital ratio (basic) pre-tax cost of debt (basic) 348 to 365 330 to 378 33 08 bdbl & bkb 1,719 788.1 8,568.6 risk-free rate pre-tax cost of debt (bkb) 1,680 to 1,730 1,590 to 1,820 25 09 bdbl & city bank (1,138.2) (1,857.8) (495) pre-tax cost of debt (city bank) debt/capital ratio (city bank) (1,100) to (1,150) (1,050) to (1,200) 42 10 bdbl & exim (734.6) (2,332.2) (230) pre-tax cost of debt (exim) ebit (exim) (710) to (740) (680) to (780) 37 11 bdbl & nbl 3,273.2 1,695.5 6,578.4 risk-free rate pre-tax cost of debt (nbl) 3,190 to 3,320 3,100 to 3,420 14 12 bdbl & padma 1,736.1 738.6 4,117.9 risk-free rate pre-tax cost of debt (padma) 1,690 to 1760 1,620 to 1830 24 13 bdbl & rakub 622.6 253.4 1,796 debt/capital ratio (rakub) pre-tax cost of debt (rakub) 605 to 640 580 to 660 31 14 bdbl & ucb (608.5) (879) (434.2) pre-tax cost of debt (ucb) debt/capital ratio (ucb) (595) to (613) (584) to (625) 35 15 bkb & agrani 1,469.2 433.3 5,894.4 risk-free rate pre-tax cost of debt (bkb) 1,410 to 1,500 1,370 to 1,580 28 16 bkb & basic 1,530.2 425.3 6,827.2 risk-free rate pre-tax cost of debt (bkb) 1,490 to 1,560 1,400 to 1,640 27 17 bkb & city bank 2,897.8 (23,058.5) 26,138 pre-tax cost of debt (city bank) pre-tax cost of debt (bkb) 2,400 to 3,100 1,800 to 3,600 17 18 bkb & exim 5,256.3 (5,479.5) 26,049.2 pre-tax cost of debt (exim) pre-tax cost of debt (bkb) 4,900 to 5,500 4,500 to 5,900 08 19 bkb & nbl 5,290.1 1,234.5 21,538.7 risk-free rate pre-tax cost of debt 5,100 to 5,400 5,000 to 5,600 07 roy, asian finance & banking review 8(1) (2024), 13-29 24 (bkb) 20 bkb & padma 3,258.9 1,063.8 19,664.4 risk-free rate pre-tax cost of debt (bkb) 3,180 to 3,300 3,020 to 3,460 15 21 bkb & ucb 6,006 (24,080.5) 22,357.1 risk-free rate pre-tax cost of debt (bkb) 5,700 to 6,200 5,300 to 6,600 04 22 city bank & exim (1,891.7) (26,665.3) 2,617.5 debt/capital ratio (city bank) debt/capital ratio (exim) (1,800) to (1,950) (1,700) to (2,080) 45 23 city bank & padma 1,925.6 (33,634.9) 11,562.5 pre-tax cost of debt (city bank) debt/capital ratio (city bank) 1,700 to 2,200 1,200 to 2,600 22 24 nbl & agrani 2,944.8 6,295.8 1,047.9 risk-free rate pre-tax cost of debt (nbl) 2,900 to 2,980 2,850 to 3,100 16 25 nbl & basic 3,290.1 1,575.7 6,947.4 risk-free rate pre-tax cost of debt (nbl) 3,220 to 3,340 3,160 to 3,470 13 26 nbl & city bank 16,952.1 (21,337.4) 39,378.8 pre-tax cost of debt (city bank) ebit (nbl) 16,400 to 17,200 156,00 to 18,000 02 27 nbl & exim 2,335.6 (11,013.2) 8,486.1 debt/capital ratio (nbl) debt/capital ratio (exim) 2,200 to 2,450 1,800 to 2800 20 28 nbl & padma 4,738.8 2,055.2 9,801.8 risk-free rate pre-tax cost of debt (padma) 4650 to 4810 4,500 to 4,950 10 29 rakub & agrani 1,313.4 (2,458) 6,212.3 pre-tax cost of debt (rakub) debt/capital ratio (rakub) 1,260 to 1,320 1,180 to 1,440 30 30 rakub & basic 502.3 195.6 1,779.9 risk-free rate pre-tax cost of debt (rakub) 485 to 510 460 to 530 32 31 rakub & city bank (5,719.7) (32,048.5) (527.7) pre-tax cost of debt (city bank) debt/capital ratio (city bank) (5,500) to (5,900) (5,200) to (6,300) 49 32 rakub & exim (3,361.2) (11,656) 4,191.8 pre-tax cost of debt (exim) debt/capital ratio (exim) (3,150) to (3,400) (2,960) to (3,700) 48 33 rakub & nbl 3,761.8 1,678.4 7,737.3 ebit (nbl) risk-free rate 3,750 to 3,800 3,600 to 3,980 12 34 rakub & padma 2,019.9 743.2 5,219.1 ebit (padma) risk-free rate 1,990 to 2,060 1,900 to 2,100 21 35 rakub & ucb (2,611.5) (16,653.5) 2,985 debt/capital ratio (ucb) pre-tax cost of debt (ucb) (2,580) to (2700) (2,490) to (2,850) 47 36 sbl & agrani 2,503.2 (353.9) 5,666.9 pre-tax cost of debt (sbl) risk-free rate 2,420 to 2,530 2,330 to 2,680 19 37 sbl & basic 2,861.3 1,263.9 6,154.3 pre-tax cost of debt (sbl) risk-free rate 2,820 to 2,900 2,740 to 3,060 18 38 sbl & bkb 6,204.8 (1,180.7) 31,519.2 pre-tax cost of debt (bkb) risk-free rate 5,900 to 6,500 5,500 to 6,800 05 39 sbl & city bank 16,731.5 (45,430.3) 143,583.6 ebit (sbl) pre-tax cost of debt (city bank) 16,300 to 16,800 15,800 to 17,000 03 40 sbl & exim 1,910.3 (16,199.2) 7,129.5 debt/capital ratio (sbl) debt/capital ratio (exim) 1,800 to 2,100 1,500 to 2,300 23 41 sbl & nbl 5,805.2 1,565.4 13,260.6 risk-free rate pre-tax cost of debt (nbl) 5,700 to 5,850 5,500 to 6,200 06 42 sbl & padma 4,300.7 417.7 9,558.9 risk-free rate pre-tax cost of debt (padma) 4,220 to 4,480 3,900 to 4,620 11 43 sbl & rakub (2,412.7) (7,735.9) 12,244.8 risk free rate debt/capital ratio (sbl) (2,300) to (2,500) (2,110) to (2,690) 46 44 sbl & ucb 19,839.7 1,387.6 39,630.3 pre-tax cost of debt (ucb) ebit (sbl) 19,600 to 20,100 18,700 to 20,900 01 45 ucb & agrani (698.2) (5,434.7) 1,108.3 debt/capital ratio (ucb) debt/capital ratio (agrani) (660) to (720) (590) to (810) 36 46 ucb & basic (950.7) (3,466.4) 8,964 debt/capital ratio (ucb) debt/capital ratio (basic) (880) to (1,020) (780) to (1,110) 40 47 ucb & city (1,801.6) (9,246.2) 1,050.4 pre-tax cost of debt (city bank) debt/capital ratio (city bank) (1,780) to (1,820) (1,560) to (1,950) 44 roy, asian finance & banking review 8(1) (2024), 13-29 25 48 ucb & exim (1,471.4) (5,448.4) 50.3 pre-tax cost of debt (exim) debt/capital ratio (city bank) (1,440) to (1,500) (1,380) to (1,570) 43 49 ucb & padma 5,033.8 (6,858.9) 14,364.8 pre-tax cost of debt (ucb) pre-tax cost of debt (padma) 4,800 to 5,200 4,600 to 5,500 09 the ranking in table 8 allows the opportunity to provide solution to the decision of which bank should merge with whom. the table provides insights about mean, minimum, and maximum synergy values for each case. in case of sensitivity, both negative and positive factors are summarized in the table. basing on 25% and 75% confidence, the range of synergy is shown for each case. finally, the ranks are shown in the last column. table 9. solution to research question 01 (the best mergers possible) merging bank best case position merging bank best case position sonali bank plc ucb 1 basic bank plc nbl 13 bangladesh development bank plc nbl 14 united commercial bank plc sbl 1 agrani bank plc nbl 16 exim bank limited bkb 8 bangladesh krishi bank ucb 4 national bank limited city bank 2 rajshahi krishi unnayan bank nbl 12 padma bank plc ucb 9 city bank plc nbl 2 table 9 shows the best merging option for each bank with the other bank. it may happen from table 8 that one bank is suited for merger for many banks. but, table 9 allows the merging suitability for every bank with the other. table 10. solution to research question 01 (based on proposed mergers by bangladesh bank) proposed cases synergy value (in crore of bdt) which plausible solutions are synergistic sbl and bdbl -639.2 negative bkb and rakub 1,650.39 beaten (bkb-ucb) basic and city bank -1,604.20 negative basic and agrani -57.4 negative exim and padma 4,317.40 positive ucb and nbl 2,517 positive based on the proposed 6 cases of the central bank, table 10 shows which of these six cases hold the positive synergy. it’s seen that case 2 (bkb-rakub merger) not only is positive, but also beats rank 4 option (bkb-ucb merger). results from research question 02 in this segment, “***” “**”, and “*” indicate “significance at 99%, 95%, and 90% confidence interval respectively. table 11. descriptive statistics variable obs mean std. dev. min max synergy 55 2208.453 4591.168 -5719.71 19839.74 beta_c 55 0.010264 0.026387 -0.03711 0.105892 cod_c 55 0.06695 0.028571 -0.07662 0.16903 tax_c 55 0.032156 0.508118 -2.10363 1.016814 dc_c 55 1.061882 0.33539 0.076925 2.292402 revenues_c 55 3199.862 2141.443 237.752 10610.75 ebit_c 55 -1178.21 1949.99 -6991.82 1636.093 roc_c 55 -0.06387 0.130302 -0.80718 0.156549 rr_c 55 0.004807 0.028564 -0.0401 0.198211 lgr_c 55 3.454545 1.408548 1 10 firmsize 55 6.13e+11 4.05e+11 7.72e+10 1.60e+12 est 55 1987.455 9.121237 1972 2011 branch 55 408.8182 288.0571 54.5 1133.5 districts 55 46.16364 10.35618 19 64 hr 55 5836.909 3147.027 929.5 14465.5 table 11 provides the summary of the data where it’s seen that the data set has a great level of variability. the minimum and maximum values have huge distances with symmetric distribution in values. there are 55 observations and all will be applicable in regression analysis. roy, asian finance & banking review 8(1) (2024), 13-29 26 table 12. corelation with p values synergy beta_ c dc_c ebit_ c roc_ c rr_c lgr_ c ln_co d_c ln_tax_ c revenues _c ln_est ln_hr branc h district s firmsiz e synergy 1.0 beta_c 0.0 1.0 0.8 dc_c 0.1 0.5*** 1.0 0.4 0.0 ebit_c -0.6*** 0.1 0.1 1.0 0.0 0.6 0.6 roc_c -0.3** 0.0 -0.4** 0.2 1.0 0.0 0.8 0.0 0.1 rr_c -0.2* -0.1 -0.6*** 0.2 0.5*** 1.0 0.1 0.5 0.0 0.1 0.0 lgr_c 0.1 0.1 -0.2 0.1 0.1 0.6*** 1.0 0.6 0.5 0.2 0.4 0.5 0.0 ln_cod_ c 0.5*** 0.1 0.6*** -0.4** -0.7*** -0.8*** 0.2 1.0 0.0 0.5 0.0 0.0 0.0 0.0 0.2 ln_tax_ c -0.5** -0.1 -0.4* -0.1 0.6** 0.4 0.0 -0.4* 1.0 0.0 0.7 0.1 0.8 0.0 0.1 1.0 0.1 revenues _c 0.1 0.0 -0.1 0.2 0.1 0.0 0.0 -0.3** 0.2 1.0 0.4 0.7 0.6 0.2 0.4 1.0 0.8 0.0 0.5 ln_est -0.2* -0.1 -0.1 0.2 -0.3** -0.1 -0.1 0.1 -0.3 -0.6*** 1.0 0.1 0.5 0.7 0.2 0.0 0.4 0.5 0.4 0.3 0.0 ln_hr 0.3** -0.1 -0.1 -0.2* 0.2 0.1 0.0 -0.1 0.1 0.6*** -0.9*** 1.0 0.0 0.7 0.7 0.1 0.2 0.5 0.9 0.3 0.8 0.0 0.0 branch 0.3* 0.2 0.1 -0.3* 0.1 0.0 0.1 -0.1 0.0 0.5*** -0.8*** 0.9*** 1.0 0.1 0.1 0.3 0.1 0.3 0.9 0.7 0.6 1.0 0.0 0.0 0.0 districts 0.1 -0.2* -0.2 -0.2 0.4** 0.2 0.1 -0.1 -0.2 0.5** -0.6*** 0.6*** 0.4** 1.0 0.4 0.1 0.1 0.2 0.0 0.1 0.3 0.5 0.4 0.0 0.0 0.0 0.0 firmsize 0.1 -0.3** -0.2 0.0 0.2 0.1 0.1 -0.2 -0.1 0.6*** -0.5** 0.6*** 0.4*** 0.6*** 1.0 0.4 0.0 0.1 1.0 0.2 0.5 0.4 0.2 0.6 0.0 0.0 0.0 0.0 0.0 the results from figure 12 show that the variables are not properly correlated to each other that reduces the chance of multicollinearity. table 13. regression analysis by ols (with variance covariance estimator) number of observations p value r-squared 55 0.0000*** 0.6186 table 14. variable-wise regression analysis by ols (with variance covariance estimator) variables coefficients robust std. error t statistics p values beta_c 13519.11 17265.91 0.78 0.438 dc_c -10411.12 5208.03 -2.00 0.053* ebit_c -0.31 0.35 -0.89 0.379 roc_c 27711.32 10741.04 2.58 0.014** rr_c -262469.40 100453.40 -2.61 0.013** lgr_c 409.61 599.19 0.68 0.498 ln_cod_c 10336.42 4196.39 2.46 0.018** revenues_c 0.64 0.33 1.93 0.061* ln_est -113398.70 220693.60 -0.51 0.61 ln_hr 769.11 3097.43 0.25 0.805 branch -0.85 4.61 -0.18 0.855 districts -135.00 73.38 -1.84 0.073* tax_c -2827.76 3013.21 -0.94 0.354 ln_firmsize 418.82 963.64 0.43 0.666 constant 889784.20 1693895.00 0.53 0.602 from table 13 it is found that there exists significant relationship between different financial factors and financial synergy value, and the null hypothesis can be rejected. the r-squared shows that changes in financial synergy value can be predicted by 61.86% by the changes in the independent variables. in table 14, it’s found that combined debt to capital, revenues, districts are significant at 90% confidence interval, while combined return on capital, reinvestment rate, and log normal value of cost of debt are significant at 95% confidence interval. roy, asian finance & banking review 8(1) (2024), 13-29 27 table 15. test of multicollinearity variable vif 1/vif rr_c 9.28 0.11 roc_c 7.19 0.14 ln_cod_c 7.00 0.14 dc_c 6.32 0.16 tax_c 4.05 0.25 ln_hr 3.90 0.26 ebit_c 3.81 0.26 ln_est 3.64 0.27 branch 3.52 0.28 ln_firmsize 3.24 0.31 districts 3.21 0.31 revenues_c 2.80 0.36 beta_c 1.87 0.53 lgr_c 1.20 0.83 mean vif 4.36 the mean vif score is 4.36 found from table 15 that shows less scope of multicollinearity in the model. using breusch-paga / cook-weisberg test for heteroskedasticity, the p value is 0.2967 that accepts the null hypothesis for homoskedasticity or, constant variance. table 16. mixed effect generalized linear model with variance-covariance estimator (vce) number of observations p value wald chi2 55 0.0000*** 127.52 table 17. variable-wise mixed effect generalized linear model with variance-covariance estimator (vce) variables coefficients robust std. error z statistics p values beta_c 26135.76 13157.09 1.99 0.047** dc_c -8697.77 3955.14 -2.20 0.028** revenues_c 0.59 0.30 1.96 0.05** ebit_c -0.35 0.28 -1.26 0.21 roc_c 25257.98 8407.77 3.00 0.003*** rr_c -235175.30 84752.21 -2.77 0.006*** lgr_c 565.06 504.91 1.12 0.26 firmsize 0.00 0.00 -0.52 0.60 hr 0.87 0.64 1.36 0.17 ln_est -74757.55 142221.70 -0.53 0.60 ln_cod_c 9557.37 3271.60 2.92 0.003*** tax_c -2374.56 2486.13 -0.96 0.34 branch -7.03 5.00 -1.41 0.16 districts -129.43 61.20 -2.11 0.034** constant 606984.80 1089697.00 0.56 0.58 the meglm with vce results in table 16 and 17 show that the null hypothesis can be rejected. also, beta, debt to capital, revenues, and districts are significant at 95% confidence interval, while return on capital, reinvestment rate, log normal value of cost of debt are significant at 99% confidence interval. discussions the study has found that out of the proposed mergers, case 2, 5, and 6 result in positive synergy, while case 2 is the most optimum synergy option. out of the ranking, table 9 provided the best matching solutions for merger by meeting the research question 1. though especially using financial inputs to predict financial synergy no exact studies have been done yet, still studies of (mucenieks, 2018), (darayseh & alsharari, 2022), (sharma, 2018), and (yiannis et al., 2007) which worked to identify impact of financial factors on financial synergy are worthy of mentioning. the studies outlined significant relationship between dependent and independent variables. in the research objective 2, this study rejects the null hypothesis by accepting that financial factors significantly impact the financial synergy. findings from figure 05 and table 8 represent that synergy values of almost all of the cases are mostly positively sensitive to pre-tax cost of debt by 35% and, risk-free rate by 32.72%., debt/capital ratio by 23.36% and 8.92% by other factors on average. on the other hand, synergy values are mostly negatively sensitive to pre-tax cost of debt by 43.36%, roy, asian finance & banking review 8(1) (2024), 13-29 28 debt/capital ratio by 36.36%, and 20.28% by other factors on average. the trend results from figure 6 show at 10% and 25% confidence, how much the synergy values can fluctuate which contribute to solutions found at table 9 and table 10. table 7 represents the scenario of the cases with mean, maximum, minimum, and standard deviation variabilities. the ols with vce output shown in table 13 represents that there exists a significant relation between the dependent and independent variables where, dc_c, roc_c, rr_c, ln_cod_c, revenues_c and control variable districts are significant which ultimately rejects the null hypothesis. the meglm with vce results also affirm the ols results with vce robustness showing significant relation in the model by 99% confidence interval. here, additionally one independent variable beta_c is also significant. thus, the null hypothesis can be rejected concluding that there exists significant relation between the financial factors and synergy value. the study has confirmed that of the models used, both the ols and meglm provide almost identical results for predicting the synergy value. finally, it can be said that the methodologies employed in the study meet both of the research objectives, and the ideas are well-conceived. there are some findings:  the study has found that out of the proposal suggested by bangladesh bank in merger, only case 2, case 5, and case 6 add value to synergy after merging. and, considering the combination options, the case 2 beats the rank 04 merger between bkb and ucb. thus, the solution is to proceed the three cases of mergers with maximum priority to implement case 2.  the study rejects the null hypothesis by accepting that there exists significant relationship between different financial factors and the synergy value. the study found that the merged independent variables debt to capital ratio, return on capital, reinvestment rate, and cost of debt, revenues, and control variable districts are significant to predict the changes in the value of financial synergy after merger. in ols with vce regression model and gaussian meglm with vce, debt to capital ratio, reinvestment rate and districts are negatively sloped to the synergy value of mergers while other significant variables are positively sloped to the synergy value of mergers.  the study affirms that in an emerging economy like bangladesh, mergers in the banking sector can result in positive synergy value. conclusions the study reveals that out of the central bank's proposed mergers, cases 2, 5, and 6 significantly enhance financial synergy after merging, and financial factors significantly impact the value of financial synergy. this article introduces a unique approach to the existing research domain by utilizing a combination of simulation and econometric analysis to assess the merger options of various bank types, such as government, non-government, and specialized banks, and by implementing a ranking methodology to determine the optimal merger solution. additionally, the study presents a novel approach to identifying the financial factors that influence the value of financial synergy. the study has validated the theory of synergy through mergers in the banking sector of an emerging economy such as bangladesh, and it recommends more mergers based on the ranking strategy provided by the study using proper methodology. the study makes minimal assumptions about the mergers' growth forecasts, which may pose a constraint in situations where external factors influence the economy. the study reveals opportunities for complex merger evaluations across other industries in emerging economies. author contributions: conceptualization, g.r.; methodology, g.r.; software, g.r.; validation, g.r.; formal analysis, g.r.; investigation, g.r.; resources, g.r.; data curation, g.r.; writing – original draft preparation, g.r.; writing – review & editing, g.r.; visualization, g.r.; supervision, g.r.; project administration, g.r.; funding acquisition, g.r. author has read and agreed to the published version of the manuscript. institutional review board statement: ethical review and approval were waived for this study due to that the research does not deal with vulnerable groups or sensitive issues. funding: the author received no direct funding for this research. acknowledgements: i acknowledge the cooperation from bangladesh bank, the central bank of bangladesh for allowing the financial statements of the concerned banks on unavailability in websites. informed 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